ELLIOT WAVE Weekly Technical Analysis 11TH FEB 2013

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Weekly Technical Analysis

February 11,2013

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

Sensex drops another 300 pts, total loss 800 pts from the 29th Jan top. CSO forecasts 5% GDP growth for FY13, lowest in decade. Companies paying lower Service Tax get show cause notices. NTPC OFS subscribed fully. ECB holds rates at record low of 0.75%. MCX-SX begins trading in equities from 11th Feb.

Top Stories of the Week

Sensex close to 2-4 line, 19100-200 crucial for a relief bounce in the next 3 days

[Technical readings carried forward from previous weeks are shown in italics. Readers can easily identify the new argumewhich are written in regular font]

Last week we discussed, “What we see as a minor top this „Jan, could turn out to be a major one if certain further

confirmations are in place from here … 1st

stage of confirmation requires break of the bigger 2-4 line, shown in Purple colostage of requires drop below Nov‟12 low … we argued that 5

thwould end below 20303 by 29

th Jan … top of 29

thJan was m

amidst RBI‟s Credit Policy. After RBI announced rate cut, traders adopted „sell on news‟ strategy.… NEoWave requires ffaster retracement of the 5

th leg, i.e. drop below 19596 within 13 days … the „Terminal‟ formation from „Nov lows co

prove an extremely bearish pattern, indicating possible downside violence.”

Sensex started higher on Monday. However, up 120 pts at open, it began selling off almost immediately. By Thursday, it broken 19596, i.e. the low of Extracting Triangle in the 5

th leg. Losing further on Friday, it finally ended 300 points or 1

lower for the week. Except IT, all other sectors ended with losses. The Consumer Durables, PSUs, Metals, Power aIndexes lost about 4 to 5% each. BSE Small-Cap Index lost 3.7%, and Mid-Cap Index lost 3%.



Sensex is down by nearly 800 pts or 4% (Nifty 228 pts) in the last 8 days from the highs it made on 29th

Jan. The broadmarket topped out earlier, i.e. on 7

thJan. While the BSE Mid-Cap Index has already lost about 9%, the Small-Cap Inde

down by nearly 12%.

As was pointed out last week, this made the current drop the biggest since Nov‟12, giving a -ve sign as per VP‟s structura

We had already turned cautious at higher levels because the time cycle indicated major top occurs during Jan-Mar perhad happened in 12 out of 13 years in the recent past. Indeed, in 50% cases, major top was hit in the month of „Janua

We were also cautious because the rallies from Nov‟12 onwards were getting smaller . Indeed, due to the smaller radevelopment post-Nov was shaping up like a Diagonal Triangle or “Terminal”.

The 5 th

leg of this Terminal from 19596 of 10th

Jan (Nifty 5940) developed as an Extracting Triangle, a 5-legged patshowing smaller up-moves (e < c < a) and bigger down-moves (d > b).

Last week, with a drop below 19596 (Nifty 5940), the 13-day long Extracting Triangle was completely retraced in 7 in about 50% time. This faster retracement confirmed end of Extracting Triangle from 10

th Jan, as well as Terminal from „

lows.

We had also warned about the downside violence, because a move in the opposite direction should begin with fasretracement of the last up-move. This was to be seen on various degrees.

Thus, not only e of Extracting Triangle (from 19884 of 24th

Jan) saw its faster retracement, the 5 th

leg of the Termin19596 of 10

thJan) also was retraced in faster time.

As per NEoWave, the Terminal should get completely retraced in maximum 50% time, but usually it does that in 25% time

The Terminal from „Nov low formed over 48 days. Therefore, „Nov lows should be broken within 12 to 24 days fromJan. Of this, 8 days are already over.

This requirement is part of what is called as “Pattern Implication” as per NEoWave logics. Patterns must follow their



implications, and they confirm when the implication is in place.

In other words, no implication, no Terminal. Thus, only if Sensex fails to break below 18256 (Nifty 5548), that we look foalternatives to our current assumptions. Else, the current assumptions are valid.

A “Terminal” terminates structure of at least one higher degree. On one higher degree, we assumed thee Terminal toof the “c” leg of Impulse from „Jun lows.

The “c” leg will be confirmed over when its 2 -4 line gets broken (1st

stage confirmation), and 5th

leg, i.e. Terminal, completely retraced (2

ndstage confirmation), both to be achieved in faster time. (These confirmations are similar to

implication for the smaller 5 th leg, which developed as a Terminal).

Further, this “c” is part of the larger D leg from Dec11 low of 15136 (Nifty 4531). Thus, the current assumption not oindicates a gradual fall below Jun‟12, but also below Dec‟11 lows.

Coming to short term scenario, the fall over the last two weeks has maintained a Red falling channel, as shown on thabove. Friday‟s intra-day drop was the biggest in the last 8 days.

Index has failed to do this in the last 8-9 days. Indeed, Sensex has now hit 9 continuous lower lows on its Daily chart.

Study of movements over last many years shows that Index recorded a maximum of 10-11 lower lows in the worst of situations. Going by this past history, Sensex may not make more than 1 or 2 lower lows from hereon.

Remember, the oscillator on the Daily chart has remained in an oversold zone. Accordingly, some relief bounce cannot out anytime in the first half of the coming week, i.e by Wednesday.

The chart shows 19100-200 (Nifty 5800-50) as a very significant area for the coming week. This area consists of the lopoint of 2

nd of 5

thleg and highest point of the 3

rd inside “c”.

The suspected relief bounce is likely to come from closer to 19100-200 (Nifty 5800-50). We must, therefore, watch this arcarefully.

The only question really is whether the relief bounce would come after breaking the Purple color 2-4 line joining „Se„Nov lows or not. As one can see on the Daily chart, Friday‟s low is very close to this 2-4 line.

However, if we check on the Nifty and Nifty Future Daily charts, the equivalent 2-4 line (joining „Sep and „Nov lows) was br

Friday. Sensex is more likely to do the same, and break its 2-4 line before bouncing.

After Friday‟s biggest sell-off in 8 days, the lows are also touching the lower end of the Red falling channel. Therefore, wasome relief in fall in the 1

sthalf of the coming week.

Bias would remain -ve as long as the action from hereon maintains the Red falling channel, and fails to take out aclose above previous day‟s high.

----------------------------------------------------------------------------------------------------------------------------- ----------------- -

Terminal is a specia l k ind of Impulse which o ccurs in the last wave posi t ion , i.e. either as “c” of Flat/Zigzag or 5 th

of Impulse. Its internal structure is made up as 3-3-3-3-3, instead of usual 5-3-5-3-5.

In other words, each leg of a Termin al would d evelop as a 3-legged or 5- legged “corrective” structure, like a Flat, ZTriangle . Also, 4th of Terminal must enter the area covered by the 2 nd (Overlap Rule).

V irtually all Terminal actions produce “NEoWave Supplemental” Price & Time actions. That a l lows markets to go

and take longer than the best calculated levels, only to d o wh at was original ly expected.

As we discussed lat week, the 5 th leg stretching b eyond 20303 price-wise and 29

th Jan t ime- wise, could indicate “NE

supplementa l ” action.

Even before -ve conf i rmat ions would occur, we were al ready approaching the m arket wi th caut ion, because of the

Mar topping c ycle and smaller ral l ies.

Remember, major tops occurred during Jan-Mar period in the last 13 years. We, therefore, continue to remain cautious, an



for actual -ve confirmations.

If the Sensex avoids what was explained earlier as “Supplemental action”, 5 th may end at a level below 20303 pric

and between 22 nd

and 29 th Jan, time-wise. At least a mino r top w as seen last week at these projected time/price le

As was mentioned, a Terminal wo uld term inate at least one high er-degree larger struc ture, which , in our case, is th

D Wave Flat from Dec‟11 lows.

Terminal wou ld create a major top , where the 13-month lo ng D leg would end , and anoth er year- long d ow nward w

E, would begin.

The caution is also advised because the pos t-pattern impl ication s of Terminal are severe. The entire Termin al is com

retraced in 50% time, though it u sual ly takes only 25% time.

This would mean there could be severe drop below „Nov lows once the Terminal is over. This, however, would be jus

beginn ing of a larger dow nwards phase , which would eventually even break below the Dec‟11 lows, as suggested by thDiametric formation since the year „2008.

Except B, all the legs of the larger Diametric from „2008 consumed about 13 months. In time sim i lar to C, the D leg has

only about 84% of C. This only highlights the “corrective” nature of the post Dec‟2011 rally.

The channel enclosing the a-b-c Flat inside the larger D leg from Dec‟2011 onwards was shown on the chart below :



The projection to upp er channel was exactly achieved.

The 80% retracement level was considered and marked as a pattern impl ic ation for the 13-mo nth lon g Double

Combinat ion mo ve marked as C. This pattern imp l icat ion, however, cannot b e str ic t ly implemented for the legs of

Triangle and Diametric, whic h are except ions to th e general rules.

On higher-degree, it was explained that the D leg from Dec‟11 onwards was part of a larger 7 - legged “Bow - Tie” Diam

This larger Diametric begins from „2008, and could develop similar to the Diametric formed during „1992 to „2003, shown on the Monthly chart of Sensex below :



This long-term picture was fist published on 6 th Feb‟2012 , with both D legs highlighted in Purple color rectangles.

In the previous instance, the D leg during „1996 -97 had retraced as mu ch as 97% of i ts precedin g C leg.

As per NEoWave, most channeled moves enclose a Complex Corrective structure involving “x” wave. Complex Correct iv

involving 2 correctives, joined by one “x” wave, is called a Double Combination, and carries a pattern imp l i cat ion

more than about 80%.

Note that the C leg from Nov‟10 to Dec‟11 was a Double Combination, with two equal -sized co rrectives (see weeklyabove), and therefore, carr ied a pattern imp l ication o f 80% retracement by th e D leg.

Further, as depicted on the chart below, since Nov‟10, it has been generally useful to consider 61.8% to 80% retracemarea as crucial for terminating m oves .



Meanwhile, since the FII activity turned a prominent factor in the Indian stock market, we examined the development of BSDollex-30 Index, which r ecently showed a Head & Shou lders form ation on its Daily chart.

Its downsides later achieved the Head-to-Neckl ine projection on dow nside , as we expected. Since the projection levmatch ed with i ts 200-day EMA, we susp ected some pul l -back to the Neckl ine.

As c an be seen on the Dol lex-30 chart below , the Index reco vered back to it s Neckl ine level for the 2 nd

t ime, but hareacted from heavily from the Neckline.



As per Wave Theory, Flat is a 3-legged corrective pattern marked as a-b-c, where “b” corrects more than 61.8% of “a”. It is3-3-5 pattern where “a” and “b” carry corrective label of :3, and “c” is an impulse label of :5.

Around a Flat, we usually d raw a line joining “0” and “b” (0 -b line), and take a parallel from the “a” point. The “c” leg shouldnormally end near such parallel. The channel indic ates simi lar i ty of i ts 3 internal legs, reason wh y Flats are cal led F

Unless it proves to an Elongated Flat (a sub- type of Flat where “c” becomes longer in terms of time and price), we‟d initiaassume any Flat to be a “common” Flat.

Inside “c” of D (beginning Jun‟12), we were expecting a 5 - legged Impu lse, because Flat is a 3-3-5 structure. As per NEoWave “Extension rule”, one of the directional leg inside an Impulse should get “extended”, i.e. achieve 161.8% ratio tolargest leg.

Since 1st

and 3rd

were “normal”, we can see a 5 th wave extending inside “c” of D. However, such a move would project val

slightly above the Nov‟10 highs, which would jeopardize the larger assumption of “Bow -Tie” shaped Diametric from „2008

We‟d, therefore, prefer 5 th of “c” not to achieve 161.8% ratio, but terminate below Nov‟10 highs, from where a dow

would open. Since E begins the “expanding” phase of the Bow -Tie Diametric, it would break below Dec‟11 lows.

The 1st

and 3rd

inside “c” of D continued for about 4-5 weeks each. We expected 5 th

to consume a similar time, and end somewhere in the month of Dec‟12 or near to it.

As the beginn ing part of 5 th show s vio lence on upside, 5

th cou ld develop internal ly as a 1

st Extension Impulse or T

Since a “Terminal” always occurs at major turning point, it would be able to generate the necessary downside power for thE leg.

In a 7- legged “Bow - Tie” shaped Diametric, one can see a reduction in magnitude from A leg to D leg. The D leg is smal lest segment of the Bow -Tie shaped Diametr ic .

The other half of this Diametric, i .e. E-F-G legs, should sh ow expand ing m agnitud es , and therefore, E should becolarger than the D leg. This can happen only when E breaks the bottom Dec‟2011.



After breaking the 14-month long channeled C (from Nov‟10 to Dec‟11), we had suspected that development post Dec‟1 potential to be marked as D leg of a much larger Triangle or Diametric from „2008.

This option was preferable because C leg from Nov‟10 was not an Impulse. A Non-impulsive C leg could only be partlarger Triangle or Diametric.

Inside D, “b” corrected “a” by 80% price-wise, and by 161.8% tim e-wise. From 4 th Jun low of 15749 (Nifty 4770), S

assumed to be forming “c” of the Flat , which should be the last “Impulsive” wave of a 3 -3-5 structure inside the Flat.

The final confirmation that 5 th of “c”, and therefore the D leg is over would require faster drop below 18255 (Nifty 5548), asNEoWave requirements.

Yearly low s

Sensex has broken „2010 low of 15652, and now in „2012 is found holding the „2011 low of 15136.

As the past instances wou ld show , once the year ly low gets brok en, a min im um of 20% cut from the low has been

phenomeno n, though gr adual ly. A 20% magnitude reduced from 15652 would calculate to about 12500 for Sensex

This level has not been tou ched so far , but should be remembered as a crucia l leve l which m atches wi th the hug e

action (refer to the Weekly chart disc uss ing 32- week cycle) seen during the „2009.

32-Week time cy cle

T he development since Mar‟09 has followed a 32 -week t im e cycle , as shown on the chart below.



This was used for ra is ing a possib i l i ty that an important low w ould be formed around 20 th Aug‟11. Sensex respon

hi t t ing the bottom on 26 th Aug.

This cycle had also ra ised the possib i l i ty of an upw ard/s ideways phase that could survive for 32 weeks from Augend either on 4

th Feb‟12 or 31

st Mar‟12, developing as a ranged movement like the Left Shoulder. The upward phas

during Feb‟12 as per this cycle.

Going by the structural possibilities from this cycle, it was suspected that Sensex could be forming an “e” leg of a posExtracting Triangle, which would remain smaller than the “c” leg. The “e” leg did remain smaller as suspected.

As we already know, Extract ing Tr iangle is a pattern w hich sho ws smal ler ra ll ies and b igger drops. Thus in one direshows e < c < a, and in the opposite direction, it shows d > b.

Above 18000, Right Should er became bigger that the Left Shoulder, which appeared rejecting the Head & shou lde

“Extracting Triangle” argu ment. However, the 32-week time cy cle may remain val id as a cycle even from h ere.

The Sensex was seen testing the “Neckline” shown on the chart, which did prove crucial, as Sensex bounced sevt imes from the Neckl ine.

Ano ther idea would be to mark the entire development as a Diametric, instead of Extractin g Triangle, and the sam

now marked on the chart . These assumpt ions ind icate an incom plete B, but conf i rms only on faster drop below th

Neckl ine, whic h is sti l l awaited.

30% Principle

Al l major tops are character ized by 30% drop from the top value. This is no rmal not o nly ins ide a bear phase, but

commo nly seen even inside a bul l phase too. The 30% taken out from th e current top value on Sensex (21109) wo

less th an 14800.

The total loss s o far, from th e high of 21109 to 15425, measures arou nd 28% so far . However, on B SE Small-Cap a



MidCap Index, the loss from „2010 high does measure more than 30% .

Overal l , it was argued muc h ear l ier , that we would see a topping form at ion spread over 2-3 mon th per iod b eginn in

„Oct‟10. This played out well as suspected. Indeed, as was observed, 60% of stocks topped out during „Oct‟10 itsemany have al ready sh aved off mu ch m ore than 30%, though Sensex i tse l f shaved off only 28%.

Compar ison w i th Jan '08 top form at ion

We compared the „2010 topping formation to the movement from Oct‟07 to Jan‟08 , a 2.5 month period just bef o re tof 21206 was hit o n Sensex. This was also an extremely vo lati le period of nearly two months, just before the market atopped out.

The following chart of „2008 period shows two equidistant parallel channels. The Sensex broke above the original cand achieved an equidist ant height at the upp er paral lel , before reacting low er into a bear phase.

One may observe the volatile development once it reached closer to the upper parallel. Inside this volatility, the market facnumber of sell-offs beginning Oct‟07, before it finally topped on 8

th Jan‟08.



A similarity can be drawn for the „2010 top formation with the developments of „2008, as shown below. Sensex watesting th e lower Blue paral lel , from wh ere it bounc ed recently. It is now trading abo ve the Blue paral lel , retesting



2450-poin t Grid c hart for t he Sensex

Sensex has been fol low ing a Grid of 2450- 2500 points since „2008 . These Grids are shown on the Weekly chart of Sebelow. One can find a bottom or a top getting formed at each of the Grid levels. Index had bro ken abov e the 17800 grid level, was testing th e next Grid level at 20250. It has now reacted lower alm

exact ly from th is Gr id leve l .



Our markets, remember, has seen mu lti fo ld ral l ies previous ly, each time con tinuin g for about 4 (four) years, after w

usual ly enters a mu l t i -year consol idat ion ph ase . In other words, “long - term” has always meant 4 years in Indian c

Remember, Sensex rallied 11- fold from 390 (Mar‟88) to 4546 (Apr‟92) in four years, after which it con sol idated for 11 yfrom „1992 to „2003.

In „2008, it completed anot her 4- year rally from „2003, during which Sensex rose 7 -fold from 3000 levels to 21000.

now consolidate for 7 year, beginning „2008, preferably forming as a Triangle or Diametric.

We explained that th e 14- month fall from Jan‟08 was a Triple Combination “A” leg of a large multi -year cons ol idatcorrective phase beginning Mar‟09 retraced about 99% of the previous fall from 21206 (Jan‟09) to 8867 (Mar‟09), (whlabeled as a Triple Combination). The longer time required wh i le ral lying is s ymptomatic of its corrective label of “B

The rally from 8047 (actually beginning at 8867) was, therefore, considered as the “B” leg. The next leg downwardbe labeled as “C”. Such a-b- c development since Jan‟08 would be considered part of the 2

nd wave of wh at appear

prob able Terminal beginning „2003.

Even though we saw the market reaching levels above Jan‟08 highs, the multi -year cons ol idation is expected to s

l ike a large decade-long Diametric , looking similar to the consolidation w e saw from „1992 to „2003. Our trad ing/invest

stra teg ies should be designed accord ing ly .

The suspected corrective phase beginning Jan‟08 would be the 2 nd

wave with in the larger 5 th wave. This 5

thwave is

suspected to be forming as a Terminal due to absence of impuls ive behavior in i ts in terna l 1 st wave . The “Terminal”

when the Sensex drops below the 2-4 line 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, T

development usu al ly violates the 2-4 l ine.

The Sensex is assumed to be under the influence of a large 8-year cycle ever since its birth. As shown on the chart below,was the beginn ing of 8-year long bu l l -run ti l l '1992. In our Super-Cycle Degree count, shown on ASA Long-Term chart



separate paragraph, we‟ve considered „1984 as the beginning point for the most dynamic 3rd wave.

The next two important turn ing points occ urred exact ly 8 years thereaft er, in '1992 and '2000 . Both these turning poimarked by stock market scams, because of which, the leaders of the rally had extremely difficult time later. For example, Aleading stock of '1992 bull market, remained below its highs till end of '2004. Similarly, the IT stocks, which were leaders orally, lost as much as 90% of their top valuations by the year '2003.

D uring „2008, we were sitting on this very important cycle, which therefore, threw up similar possibilities.

In the previous 8-year cycle top dur ing „1992, Sensex lost 57% from 4546 to 1980 . In the next cycle top, the cut was al

58% from 6150 in „2000 to 2594 in „2001 .

We had, accordingly, targeted sub -10k levels for Sensex price-wise during „2008 -09, and a minimum of 13 months in t

phase, time-wise. The price-time targets were achieved as Sensex dropped 63% from 21206 to 7697. The yearly channelbelow, which was used earlier to project 20000 level for the Sensex during „2007, was broken when the Index moved belowBreak of this long -term channel also weighed in favor of a larger corrective phase fol lowin g this 8-year cyc le.

Appendix : Lo ng-term s cenar ios for Sensex

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

The first one assumes that a large Triple Combination corrective, beginning Sep'1994 got over in Oct'2005 at 7656. The lacorrective within this Complex Corrective phase formed as a "Non-Limiting" Running Triangle. This has been my preferredscenario for many years, which I had assumed to be under development since I began long- term forecasting during „1997This one was the basis of “Forecast for the 21

st 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 from Apr'1992 to May'2003. As I had shown, if one projects the width of this channel on upper side, such a projection also



20000 as the “minimum” target. Thi s forecast was achieved. 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 3

rd was an “extended” leg

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 dea ”Terminal”, because its lower -degree 1

st wave since May‟03 developed as a Diametric (a “corrective” structure rather tha

“impulse”).

Within the non-directional legs, 2nd was exactly 61.8% of 1st value-wise, and 161.8% time-wise. The 4th was 38.2% of 3rwise, 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 both 3rd as well as 5thbe extended waves. This scenario is shown on the the chart given below :



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 cotwo Triangular patterns, one initially “Contracting” up to the "d" leg, followed by an “Expanding” one. The contraction point leg, and the legs on either sides of it tend to be equal. Accordingly, "c" and "e" were equal in "log scale", both showing abogains. 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 the corrective structure inleg, larger 5

th could be developing as a Terminal. Since „2008, we are into its 2nd wave, which could continue to develop o

years from „2008.

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

The wave-count presented on ASA Long-term Index favors the alternate wave-scenario discussed above. The labels showmarket is into the lower-degree 5th of the SC-degree 3

rd or 5

thwave. If a "Double Extension" unfolds, Sensex could be proj

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 muc

levels than 50K, but end surely above 21000.

I f the 5 th prov es to be a Termin al, one larger-degree label of 3

rd wi l l have to change to 5

th , because only a 5

th of the

be a Terminal. The Super-Cycle-Degree markin g for 1 st and 3

rd shown , would then change to 3

rd and 4

th respective

shown in Whi te .



Disclaimer : These notes/comments have been prepared solely to educate those who are interested in the useful applicatioTechnical Analysis. While due care has been taken in preparing these notes/comments, no responsibility can be or is assu

any consequences resulting out of acting on them.

ELLIOT WAVE Weekly Technical Analysis 11TH FEB 2013

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