Doc_Weekly_2010_11_08

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Weekly Technical Analysis

Nov 08, 2010

- By Vivek Patil, India's foremost expert in Elliot Wave Analysis

• Sensex holds Neckline to surge to a new closing high. • RBI raises rates for the 6th time this year. • US Fed commits $600 billion as 2nd quantitative easing measure. • Coal India lists at 40% premium to its issue price. • Mutual Funds see net inflows. • Trading halts for 2 hours on BSE on technical glitch.

• US President Obama visits India, talks business.

Sensex holds the crucial Neckline, surges to a new closing high

Last week I said, “Sensex was found attempting to hold the crucial Neckline of what looks like apotential Head & shoulders formations spread over the last six week … Whether market can hold on tothe Neckline and surge decisively higher, would be a crucial decider not only for the coming weekbut also for the New Settlement which comprises of Diwali.”

Sensex held the Neckline and surged decisively higher , almost to a new historic high, at least on aclosing basis. On balance, Sensex closed nearly 5% higher for the week.

While all sectors finished with gains, Bankex outperformed with a near 7.5% gain.

Sensex formed the biggest Bull for the week in last 11 months, canceling out bearish implications of thesuspected Head and Shoulders formation.

We saw four gap-ups last week, beginning Monday, through Friday. This does indicate a strongmomentum, which can turn dangerous anytime in the short term. Further, any counter move can beequally violent in the opposite direction.

Probable wave-structure for the 2-3 week down-move from 20855 to Neckline could be part of F, whichmay still be forming OR G may have opened already from the Neckline.

Instead of insisting on any fixed wave-count, we have observed that Sensex has turned volatile since

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‘Oct. It was argued that the volatility can be part of 2-3 month long topping formation. We also haddrawn its comparison with the movement during Oct’07 to Jan’08.

Since we saw four gap-up actions last week already, action looks overstretched. We may, therefore,watch if the gap-up actions continue in the New Samvat. Failure to do that, followed by inability tocarry itself above the opening session, could spell beginning of trouble.

Gap is a technical support. We may, accordingly, watch if the last gap of Friday, at 20917-962, can hold.Closes below the gap, and staying below it for three more days, would turn it into an Exhaustion Gap.

Previously, we noted that Sensex was moving in a range for nearly 3 week. This range measured about600 points, roughly from 19800 to 20400. Last week’s move broke out of this range . As mentionedpreviously, a breakout from such a range can carry a 600-pt implication over and above 20400.

With Friday’s high at 21109, Sensex has achieved that implication already . Add to this, oscillatorsthat would be reaching maturity levels after 5 days of gap-up gains, and the answer would be to becareful in the short term. Watch for weakening signs discussed.

Strength above 21100-200 would weigh in favor of current rally being G leg, for targets, explainedelsewhere, at about 22700. [Technical readings carried forward from previous weeks are shown in italics. Readers can easily identify the new arguments given in regular font]

Comparison with Jan'08 top formation

We can compare the current phase to the period from Oct’07 to Jan’08 , a 2.5 month period just before the high of 21206 was hit on Sensex. This was also an extremely volatile period of nearly twomonths, just before the market actually topped during Jan’08.

The following chart of that period shows two equidistant parallel channels. The Sensex broke theoriginal channel and achieved an equidistant height at the upper parallel.

One may observe the volatile development once it reached closer to the upper parallel. Within thevolatility, the market faced number of sell-offs beginning Oct’07, before it finally topped on 8 th Jan’08.

A similarity has been drawn for the current phase to the development above, as Sensex is againcloser to its previous highs.

Following chart shows similar equidistant channels. Sensex was hitting the upper parallel last week,

which caused the volatility.

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Structurally, if we assume E leg is ending at the upper channel showing equality of E with C, then F candrop lower to test the middle line of the parallels, as if did during Oct’07 to Jan’08 period .

Once the support at the middle line is held by the F leg, we may expect G to move higher to theuppermost parallel, preferably targeting 22700 (our next Grid level), sometime in Nov-Dec’10.

Nov’10 will be 34

th

month from Jan’08 top, and Dec’10 will be 21

st

month of rally from Mar’09bottom.

Previous technical arguments

Previously, I compared the Sensex development with the development in Dow chart during ‘2003-07 asshown below.

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It was also observed, that Sensex has been following a Grid of 2450-2500 points since ‘2008 . These

Grids are shown on the Weekly chart of Sensex below. One can find a bottom or a top being formed at the Grid levels.

After having our target near Grid of 20250, Sensex is now trading above it. A decisive move sustaining above 20250 can open the next Grid level of 22700 .

Despite that possibility, the larger label for the rally since Mar’09 will be maintained as a correctiveB leg. That is because this rally is slower compared to previous fall (A leg). Against the 14-month

period consumed by the fall (A), this rally (B) has consumed 19 months.

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Going by my old arguments since Jun’09 : (1) the PE ratio is touching maturity level under normal conditions of the market (2) Sensex has doubled from its bottom levels (3) the main buying force,i.e. FII investment, has been generating reducing returns (4) Daily Oscillators are on –veDivergence (5) Weekly Oscillators are in negative mode.

These arguments ensured that whatever euphoria we saw in the market was limited only to select

individual stocks. Sensex itself was oscillating around 15500-18000 levels for 16 months sinceJun’09.

As per these old arguments, however, the next grid indeed remains a Bubble territory.

Our markets, remember, has seen multifold rallies previously, each time continuing for about 4(four) years, after which, it usually enters a multi-year consolidation phase . In other words, “long-term” means 4 years maximum for India markets.

Remember, Sensex rallied 11-fold from 390 (Mar’88) to 4546 (Apr’92) in four years, after which it consolidated for 11 years from ‘1992 to ‘2003.

In ‘2008, it completed another 4-year rally from ‘2003, during which Sensex rose 7-fold from 3000 levels to 21000. It may now consolidate for 7 year, beginning ‘2008, preferably forming as aTriangle or Diametric.

The 18-mont corrective phase beginning Mar’09 retraced about 80% of the previous 14-month fall from 21206 (Jan’09) to 8867 (Mar’09), which was earlier labeled as a Triple Combination shown above.The longer time required while rallying is symptomatic of its corrective label.

I explained the 14-month fall as the “A” leg of large multi-year consolidation, preferably aTriangle. [because as per NeoWave theory, Triple Combinations can occur only as the largest leg of aTriangle or Diametric].

The rally from 8047 (actually beginning at 8867) was considered as the “B” leg. The next leg downwards would be labeled as “C”.

The a-b-c development since Jan’08 was considered part of the 2 nd of a larger Terminal beginning ‘2003.

Even if we see the market reaching levels above Jan’08 highs, we may see the multi-year consolidation taking shape of a large decade-long Diametric , looking similar to the consolidation wesaw from ‘1992 to ‘2003. The current “b” leg, would thus become “b” of much larger Diametric. Our trading/investment strategies should be designed accordingly over the next 2-3 years.

The suspected corrective phase beginning Jan’08 would be the 2 nd wave within the larger 5 th wave.This 5 th wave could be forming as a Terminal . Terminal confirms when the Sensex drops below the 2-4line of one higher degree.

One may see the Yearly chart in Appendix, which shows the 2-4 line and its values for the next three

years. Remember, Terminal development usually violates the 2-4 line, and Triangle in the 2 nd

wave position is allowed only inside a Terminal Impulse (and not under normal impulse).

On Balance Volume (OBV) shows a sideways development for over a year, and a falling volume curve asmarked.

OBV has broken out of the Red channel shown below, which is a positive sign.

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The yearly channel, which I used earlier to project 20000 level for the Sensex during ‘2007, was broken

when the Index moved below 17200. Break of this long-term channel also weighed in favor of thelarger corrective phase as per 8-year cycle.

The current rally can be seen attempting to pull its head above the previous breakdown level.

Appendix : Alternative scenarios for Sensex

As for the larger-degree wave-scenarios, I consider two alternatives :

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The first one assumes that a large Triple Combination corrective, beginning Sep'1994 got over inOct'2005 at 7656. The last corrective within this Complex Corrective phase formed as a "Non-Limiting" Running Triangle. This has been my preferred scenario for many years, which I had assumed to be under development since I began long-term forecasting during ‘1997-‘1999. This one was the basis of “Forecast for the 21st Century” article published in Business Standard (which can be read on vivekpatil.com).

This scenario also combines well with the traditional channeling technique. Sensex followed a parallel channel for 11 long years from Apr'1992 to May'2003. As I had shown, if one projects the width of thischannel on upper side, such a projection also gave 20000 as the “minimum” target. This forecast wasachieved. This scenario is shown on the chart given below :

As per my second alternative, a Super-Cycle-Degree 3rd (or 5 th ) began since Nov’84. Its internal 3rd wasan “extended” leg, which achieved exactly 261.8% ratio to the 1st on log scale. The Sensex is now forming its 5 th Wave, and the same is likely to develop as a ”Terminal”, because its lower-degree 1st wavesince May’03 developed as a Diametric (a “corrective” structure rather than an “impulse”).

Within the non-directional legs, 2nd was exactly 61.8% of 1st value-wise, and 161.8% time-wise. The 4thwas 38.2% of 3rd value-wise, and 261.8% time-wise, as shown below.

Since the 5 th is now more than 61.8% of 3rd , it may lead to a "Double Extension" scenario, wherein both3rd as well as 5th would be extended waves. This scenario is shown on the the chart given below :

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Development from May’03 is a 7-legged Diametric formation, marked as a-b-c-d-e-f-g. It is called

"Diametric" because it combines two Triangular patterns, one initially “Contracting” up to the "d" leg,followed by an “Expanding” one. The contraction point is the "d" leg, and the legs on either sides of it tend to be equal. Accordingly, "c" and "e" were equal in "log scale", both showing about 60% gains. Similarly,"g" was equal to "a", both showing about 115% gain.

.

The Diametric development from 2003 to 2008 has been considered as the 1st of the 5 th. Due to thecorrective structure in the 1st leg, larger 5 th could be developing as a Terminal. Since ‘2008, we are into its2nd wave, which could continue to develop over 8 years from ‘2008.

The "Double Extension" scenario was also shown on following ASA Long-term Index (chart below). I've

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created this chart combining Index compiled by a British advisor (from '1938 to '1945), RBI Index ('1945 to '1969), F.E Index ('1969 to '1980) and Sensex (thereafter till date).

The wave-count presented on ASA Long-term Index favors the alternate wave-scenario discussed above.The labels show that the market is into the lower-degree 5th of the SC-degree 3rd or 5 th wave. If a "DoubleExtension" unfolds, Sensex could be projected to achieve even 50000+.

A break of 2-4 line would confirm the Terminal development inside the 5 th, and would therefore, restrict the upsides to much lower levels than 50K, but end surely above 21000.

If the 5 th proves to be a Terminal, one larger-degree label of 3 rd will have to change to 5 th, becauseonly a 5 th of the 5 th can be a Terminal. The Super-Cycle-Degree marking for 1st and 3rd shown,would then change to 3rd and 4th respectively, as shown in White.

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