September Analysis

8/3/2019 September Analysis

1/20

Sensex turns volatile after touching levels closer to previous low of 17300. CAG criticizes Air India and Aviation ministry for unsound

decision/implementation. CAG report on D6 fields suggests Reliance holding oil fields in improper

manner. US president proposes $447 billion jobs plan. Reddy bros. arrested in illegal mining scam. Mr. Amar Singh and two BJP leaders arrested in cash-for-voles scandal. Union cabinet clears new land acquisition law offering generous

compensation. India's gold imports rose 60% during Apr-Jun quarter. Organized retailers report highest-ever monthly sales during 'Aug. US demands details of its citizens using swiss a/cs to dodge taxation. RBI says banks should not recover pre-payment charges on loans. India's policy-makers to discuss floating sovereign wealth fund. Delhi hit by bomb blast at court area. Rupee drops to 1-year lows.

Sensex achieves 17212, up 1446 pts from 15766, but turns volatile for acorrectionLast week we discussed, If the current 3-day move is d of ExtractingTriangle, then it should not become larger than a. This means, it shouldnot cross 17025-30 level. Since Sensex has already touched 16990, we shouldbe watching the current levels failure to take out 17025-30 could force a dip(e leg of Extracting Triangle), for a higher bottom.

Sensex took the dip initially during the week, exactly as expected, formed ahigher bottom as e leg of the Extracting Triangle. The 502-point dip of e legmeasures about 61.8% ratio to the previous dip we marked as the c leg .Recovering 725 points later, by Friday Index had touched a high of 17213.This achieved our target area mentioned as 17000-800. Turning volatile onthe last day, Index lost 382 points, and closed flat for the week as a result.

Top Stories of the Week


2/20

While Sensex ended flat, Cap. Goods and Auto Index outperformed with 2-3%gains. Small-Cap Index was up 2.4%. However, Metals and IT Index finishedabout 1% lower.

Post Nov10, intermediate bottoms were formed during Nov10, Feb11, andlatest during Aug11. Post these bottoms, the first segment of rally measured1263 points during Nov10 and 1395 points during Feb11. The current rallymeasured an equivalent 1446 points till last Friday. This could suggest aprobable maturity at current highs.

In the coming week, based on the maturity argument, well watch how deep therally gets corrected before another segment of rally can occur.

Structurally, if our contention that Extracting Triangle developed in the 2ndcorrective of A leg is true, then correction should not drop below e, i.e.last weeks low of 16488.


3/20

Structurally, inside the larger A leg from 8thJul, the 1st corrective was assumedas Elongated Flat, and 2nd corrective as Extracting Triangle.

In the 2nd corrective, e < c < a situation on directional side (drops getting smaller),and d > b situation on non-directional side (rallies getting bigger) led us to the

assumption of Extracting Triangle in the 2nd corrective.

Time-wise also, 2nd corrective consumed exactly 61.8% time compared tothe 1st corrective.

While the lower shadows on two consecutive days on last Monday andTuesday indicated support area near 16500-600, the channel enclosing the8-day rally shows supports near 16700-50 at the lower channel.

The channel shown on the charts stands for equality of two drops inside

the 8-day up-move. The lower end of this channel is at 16700-50.

Last Wednesdays action showed gap-up move at 16894-922. Fridays action,however, formed as an Engulfing Line Bear, which was the largest bear candle inthe last eight days. The action closed below the gap-up area, and reduced itspositive influence.

Deeper correction would be expected if the lower end of the channel, i.e.16700-50, fails to hold. In such a case, Sensex can test downsides up to16488, the end-point of Double Combination ending with Extracting

Triangle (i.e. A leg).

The current structural assumption, that A leg ended as a Doublecombination can, then, remain in contention only if 16488 does not breakon downside.

The alternate assumption, shown in blue, would, however, be applicable if16488 level breaks.This alternative assumes that the 2nd corrective inside Aleg is still forming as normal Contracting Triangle, wherein, the current fallwould be marked as the c of such Triangle. This development would belooking similar to bottoming formation during Feb11 (post-17296).

This alternative still remains in contention as the Index did not cross the xpoint near 17250 last week in faster time.

In any case, our target area of 17000-800 is already reached. Since Index hasalready hit 17212 last week, even our highest expectation of 17800 does notappear to be much of an upside. Under the circumstances, a stock-specific


4/20

rotational approach only can generate better returns.

Overall, the bottom which was hit as per 32-week cycle during Aug, may hold for4-10 weeks, or alternatively, for 32 weeks. However, with limited upsides of17000-800 value-wise, the phase developing from Aug low to fallmay see

several attempts at the target area, resulting into a ranged activity between15652 (2010 low) and 17800.

Structurally, on one higher degree, we had assumed the development sinceNov10 to Jun11 as the 1st Corrective (a Neutral Triangle), and Jul rally as an X-wave thereafter. The post-Jul fall was considered A of 2nd corrective.

Thechart given below shows equidistant parallel lines enclosing thedevelopment since Nov10. Further, it shows how Sensexrespected mostof its important lows as resistances later.

This chart also shows the possible upsides may be limited to 17300 to 17800,which are not only the previous lows, as marked, but are also the values alongthe upper parallel line.


5/20

If the fall post-Jul is A leg of the 2nd corrective, the B leg can consume 4 to

10 weeks testing 17300-800 area. Alternatively, the development sinceMar09 could be assumed as a large Extracting Triangle, which hasfollowed the 32-week time cycle explained in the next para..

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

Is larger B from Mar'09 still on ?

Thedevelopment since Mar09 shows smaller rallies andbigger drops, andthe same has followed a 32-week time cycle, as shown on the chart below.

This had raised a possibility that an important low may be formed around20th Aug. Sensex responded by hitting the bottom on 26th Aug, andrecovering 1224 points thereafter.


6/20

This now raises the possibility of an up-move that could consume 32weeks, and end either on 4thFeb12 or 31stMar12, with the rangedmovement like the Left Shoulder shown on the chart.

Going by the structural possibilities form this, such as action could be an Eleg of a possible Extracting Triangle, which would remain smaller than theC leg.

As we already know, Extracting Triangle is a pattern which shows smallerrallies and bigger drops. Thus in one direction, it shows E < C < A, and inthe opposite direction, it shows D > B.

On one higher degree, Extracting Triangle (from Mar09) would make up thelarger B leg from Mar09 lows of 8047, which is correcting the 14-month

long A leg from Jan08 to Mar09.

Time-wise, this B leg ending Feb-Mar12 would consume as much as261.8% time compared to A, before C leg of the equivalent degree goesdown.

This study shows the possibility that the real C leg of drastic fall couldbegin only next year. Well keep our fingers crossed on such a possibility.


7/20

We earlier assumed a Running Expanding Triangle developing since Nov10.

This assumption was later modified in favor of a Neutral Triangle fromNov10 to Jun11.

In the larger picture, the current phase has been assumed as C wave of an A-B-C formation from 2008. Since A was a 14-month affair and B consumed 20months, the C could take 12 to 18 months to complete.

As a result, theExpanding Triangle OR Neutral Triangle, whatever may bethe case, was argued to be only the 1stcorrectiveinside a the larger C, whichcould develop itself into a Double Combination, similar to what S&P-500 Index

did during 2000-2003.

Expanding Triangle is a rare formation as B of Flat, but can occur as the 1stcorrective of a large Complex Corrective phase.

Most if itslegs are spiky at end-point, which surprises players with suddenreversal. Themiddle portion of each leg generally shows consolidation.


8/20

These characteristics are exactly reverse of what we would expect for a leg ofContracting Triangle.

TheA leg of ET is violent, but usually retraces only about 38.2% of theprevious move. In a downward running ET, B upwards maintains positive hopes

of investors. The C leg, however, drops to about 61.8% levelof the previousmove, thus surprising investors.

The D leg, then, raises the hopes again, only to open adevastating E leg,which can achieve as much as 161.8% to 261.8% magnitude compared withits A leg.

The S&P chart above provides the exact pictorial description of what we havediscussed about the formation here.

Further, during its development, expanding magnitudes indicate extremelevels of bull-bear fight, with both sides getting surprised by suddenreversals. Such a fight can go to an extreme extent. While Bulls feel Bearshave no business to be in the market, Bears feel exactly the reverse.


9/20

All major tops are characterized by 30% drop from the top value. This is not

only normal when a bear phase starts, but is seen inside a bull market too(as we saw during 2004 and 2006). The 30% taken out from the current topvalue on Sensex (21109) would be less than 14800.

Thetotal loss so far, from the high of 21109 to 15766, measures 5343points, which is only about 25% cut so far. However, on BSE Small-Cap andMidCapIndex, the loss from 2010 high does measure 30% or more.

Overall, it was argued much earlier, that we would see a topping formationspread over 2-3 month period beginning Oct. This played out well as

suspected. Indeed, as was observed, 60% of stocks topped out duringOct10 itself, and many have already shaved off much more than 30%.


10/20

Comparison with Jan'08 top formation

We cancompare the current phase to the period from Oct07 to Jan08, a2.5 month periodjust before the high of 21206 was hit by Sensex. This wasalsoan extremely volatile periodof nearly two months, just before the marketactually topped out.

The followingchart of that period shows two equidistant parallel channels.The Sensex broke the original channel and achieved an equidistant heightat the upper parallel before reacting lower.

One may observe the volatile development once it reached closer to the upperparallel. Inside this volatility, the market faced number of sell-offs beginningOct07, before it finally topped on 8thJan08.


11/20

Asimilarity can be drawn for the 2010 top formation with the

developments of 2008, as shown below.


12/20

Previous technical arguments

We may also compare theSensex development from Mar09 onwards with theDiametric formation onDow chart, which developed during 2003-07, asshown below.


13/20

It was also observed, thatSensex has been following a Grid of 2450-2500

points since 2008. These Grids are shown on the Weekly chart of Sensexbelow. One can find a bottom or a top being formed at the Grid levels.


14/20

Our markets, remember, has seenmultifold 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 has always meant 4years in Indian context.

Remember, Sensex rallied11-fold from 390 (Mar88) to 4546 (Apr92) in fouryears, after which itconsolidated for 11 years from 1992 to 2003.

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

We explained the 14-month fall from Jan08 as the A leg of large multi-year consolidation. The corrective phase beginning Mar09 retraced about80% of the previous fallfrom 21206 (Jan09) to 8867 (Mar09), (which waslabeled as a Triple Combination). The longer time required while rallying issymptomatic of its corrective label B.


15/20

Therally from 8047 (actually beginning at 8867) was, therefore, consideredas the B leg. The next leg downwards would be labeled as C.Such a-b-c development since Jan08 would be considered part of the 2ndwave ofwhat appears as a probable Terminalbeginning 2003.

Even if we seethe market reaching levels above Jan08 highs, the multi-year consolidation is expected to shape up like a large decade-longDiametric, looking similar to the consolidation we saw from 1992 to 2003. Ourtrading/investment strategies should be designed accordingly.

The suspected corrective phase beginning Jan08 would be the 2ndwavewithin the larger 5thwave. This 5thwave is suspected to beforming as aTerminal. Terminal confirms when the Sensex drops below the 2-4 line of onehigher degree.

One may see the Yearly chart in Appendix, which shows the 2-4 line and itsvalues for the next three years. Remember, Terminal development usuallyviolates the 2-4 line.

The Sensex is assumed to be under the influence of a large 8-year cycle eversince its birth. As shown on the chart below, '1984 was the beginning of 8-yearlong bull-run till '1992. In my Super-Cycle Degree count, shown on ASA Long-Term chart under Appendix, I have, in fact, considered 1984 as the beginningpoint for the most dynamic 3rd wave.

The next twoimportant turning points occurred exactly 8 yearsthereafter, in'1992 and '2000. Both these turning points were marked by stock market scams,because of which, the leaders of the rally had extremely difficult time later. Forexample, ACC, the leading stock of '1992 bull market, remained below its highstill end of '2004. Similarly, the IT stocks, which were leaders of '2000 rally, lost asmuch as 90% of their top valuations by the year '2003.

In the previous 8-year cycle topduring 1992-93, Sensex lost 57% from 4546to 1980. In the next cycle top, the cut was almost 58% from 6150 in 2000 to2594 in 2001.

I had, accordingly, targeted sub-10k levels for Sensexprice-wise, and aminimum of 13 months into bear phasetime-wise. The price-time targets wereachieved as Sensex dropped 63% from 21206 to 7697. The yearly channel,shown below, which I used earlier to project 20000 level for the Sensex during2007, was broken when the Index moved below 17200. Break of this long-termchannel also weighed in favor of the larger corrective phasefollowing this 8-year cycle.


16/20

Appendix : Long-term scenarios for Sensex

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

The first one assumes that a large Triple Combination corrective, beginningSep'1994 got over in Oct'2005 at 7656. The last corrective within this ComplexCorrective phase formed as a "Non-Limiting" Running Triangle. This has beenmy preferred scenario for many years, which I had assumed to be underdevelopment since I began long-term forecasting during 1997-1999. This one

was the basis of Forecast for the 21stCentury article published in BusinessStandard (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 this channel on upper side, such a

projection also gave 20000 as the minimum target. This forecast was achieved.


17/20

This scenario is shown on the chart given below :

As per my second alternative, a Super-Cycle-Degree 3rd(or 5th) began sinceNov84. Its internal 3

rdwas an extended leg, which achieved exactly 261.8%

ratio to the 1ston log scale. The Sensex is now forming its 5thWave, and thesame is likely to develop as a Terminal, because its lower-degree 1stwavesince May03 developed as a Diametric (a corrective structure rather than animpulse).

Within the non-directional legs, 2nd was exactly 61.8% of 1st value-wise, and161.8% time-wise. The 4th was 38.2% of 3rd value-wise, and 261.8% time-wise,

as shown below.

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


18/20

Development from May03 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, oneinitially Contracting up to the "d" leg, followed by an Expanding one. Thecontraction point is the "d" leg, and the legs on either sides of it tend to beequal. Accordingly, "c" and "e" were equal in "log scale", both showing about60% gains. Similarly, "g" was equal to "a", both showing about 115% gain.


19/20

.

The Diametric development from 2003 to 2008 has been considered as the 1st ofthe 5th. Due to the corrective structure in the 1st leg, larger 5thcould bedeveloping as a Terminal. Since 2008, we are into its 2nd wave, which couldcontinue to develop over 8 years from 2008.

The "Double Extension" scenario was also shown on following ASA Long-termIndex (chart below). I've created this chart combining Index compiled by a Britishadvisor (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 3rdor 5thwave. If a "Double Extension" unfolds,Sensex could be projected to achieve even 50000+.

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


20/20

If the 5thproves to be a Terminal, one larger-degree label of 3rdwill have tochange to 5th, because only a 5thof the 5thcan be a Terminal. The Super-Cycle-Degree marking for 1stand 3rdshown, would then change to 3rdand4threspectively, as shown in White.

September Analysis

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