Weekly Technical Analysi 3rd Sep 2012

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Weekly Technical Analysis

September 03,2012

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

Sensex reacts from 80% retracement level, loses 353 pts for the week. GDP grows at 5.5% in 'Jun Quarter, beats market expectation. Revival of monsoon reduces seasonal deficiency. PM takes full responsibility of decisions on coal, but disputes CAG allegations. Parliamentary Standing Committee blames retrospective tax lows and GAAR. Shome Committee set up by PM suggests GAAR should be deferred by 3 years. Parliament proceedings remain stalled as BJP demands PM's resignation.

Top Stories of the Week

ensex reacts from 80% retracement level, 4th wave achieves 61.8% ratio with 2nd

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

ast week we discussed, “body of the Weekly candle has gradually reduced over the last four weeks . As a result, last wenverted Hammer / Shooting Star like candle can have negative implications if the action weakens below its low of 17700-Nifty 5365-68) … On the upside, a historically important level of 80% level to preceding fall was touched exactly … Thois insignificant from Wave perspective, we may consider 80% retracement as crucial for the time being … development o

he 6-day rally is along the lower line of our original rising channel. More channels could be drawn only at lower angles. This crove a warning sign for the bulls.”

ensex weakened below previous week‟s candle on the very first day. Losing further on all the days except Thursday, itnally ended with a net loss of 353 points (Nifty 128 points) for the week. While Sensex broke lows of preceding two weeksifty broke below 3 weeks. The action formed the biggest Weekly Bear candle in three months. Except FMCG and Pharll other sectors ended in Red. While the Metal Index lost 7%, Realty and Capital Good Indexes lost about 5% each.



tructurally, we have been assuming an Impulsive “c” of larger D to develop as a 1st

Extension Terminal. While the high

egree D began from Dec‟2011 lows, its lower -degree “c” began from „Jun lows.

nside “c”, it was mentioned that “3rd

will be smaller than the 1st, and 5

thwill be smaller than the 3

rd. On the other side, 4

thshou

emain smaller that the 2nd

. This should give “c” a shape of a “Diagonal Triangle”.

was also pointed out that “3rd

would be considered complete when the current drop breaks the low of last segment oally, i.e. 17622 (Nifty 5341), within the next 2 trading sessions.

was said that if 3rd

confirms complete, we expect 4th

wave to drop lower, but remain a smaller affair compared to 2nd

,efore 5

th moves higher, and Terminal “c” gets over.

Completion of the 3rd

got confirmed exactly on the 2nd

day, on Tuesday, by way of break below 17633 (Nifty 5341) [lowmade on the day of CAG reports presentation in the Parliament]. The current 6-7 day fall is, therefore, labeled as the 4wave inside “c”.

he 3rd

wave ended exactly at 80% retracement level to the preceding fall from 18524 (Feb‟12) to 15749 (Jun‟12), whichad considered crucial on the upside.

he preceding Feb-to-Jun fall, remember, was a Double Combination, which carries a pattern implication of 80% as peEoWave, and the same is achieved.

o far, the 4th

is smaller than the 2nd

. In fact, at the last week‟s low of 17338 (Nifty 5239), 4th

achieved 61.8% ratio to the 2xactly.



he Flat assumed inside D (from Dec‟11 lows) is assumed as a 3 -3-5 structure, in which the lower-degree “c” has to be anmpulse, which can be either “ Normal ” or “Terminal”. Due to the reasons discussed in previous weeks, we were assuming “c” tevelop as a “Terminal”.

As was said, “Terminal” is a 3-3-3-3-3 structure, which means all its legs, i.e. 1-2-3-4-5, would carry a label-3 “Corrective”

tructure, like a Zigzag, Flat, Triangle or a complex combination of such correctives.

erminal is extremely bearish pattern eventually. Once completed, the entire Terminal gets retracement completely ino 50% time of such Terminal. This would mean drop below „Jun lows of 15749 (4770).

he candles on the last two trading sessions have matching lower shadows. Therefore, the shadows created consecutively onhese two days could prove a technical support area.

As said before, the low of Friday‟s candle was at 17338, where 4th

achieves 61.8% ratio to the 2nd

.

We had marked the 2nd

wave from 17631 to 16598, i.e. 1033 points. The 61.8% magnitude to this would be 638 points. Themagnitude of 4

th, so far, is from 17973 to 17338, i.e. 635 points, which is almost exactly 61.8% ratio.

On Nifty, the 2nd

was from 5349 to 5032, i.e. 317 points. The 61.8% of this would be 196 points. The 4th

wave from 5449 to 523Friday‟s low) measures 210 points, only 16 points more than the 61.8% calculation.

On Nifty Future, the 2nd

was from 5364 to 5034, i.e. 330 points. The 61.8% of this would be 204 points. The 4th

wave fro463 to 5259 (Thursday‟s low) measures 204 points, which is an exact 61.8% calculation.

he current lows are also close to the technical support at the gap-up area of 17313-208 created on 6th

Aug. We may,herefore, see if these technically crucial levels hold, and if the lowest point of 4

thhas already been hit on Friday or is

round the corner.

he possible “Diagonal Triangle” shape, which usually encloses any 1st

Extension Impulse (1st

Extension Terminal is the currease) is marked on the chart.

While 1-3 line is already confirmed, the 2-4 line would establish itself if the current lows hold.

he 4th

wave has, so far, consumed 50% time compared to the 2nd

. End of 4th

could, however, be guessed when the actiontrengthens and closes above any previous day from here.

ailure to hold the levels discussed, and further drop which distorts the Diagonal Triangle shape of the Terminal, could mean thhe Terminal in “c” could end with a 5

thFailure, or force us to mend our current assumptions to something else which is not cle

his stage.

As one may have noticed, market has not moved in a secular fashion lately, and has indeed shown divergent behavior lateWhile IT, FMCG, Pharma sectors were seen holding the market, the Realty, Metals and Bank indexes kept a negative

ressure on.

ndeed, while Realty, Metals Indexes touched their respective 6-month lows, FMCG and Pharma Indexes are touching

heir respective all-time high levels.

Also, the damages in broader market are more severe. While Sensex has lost about 3.6% in the last 7 days, the Small-Capndex came down by over 5%. While Sensex is still 4.5% above its „Jul lows, the Small -Cap Index has broken its Jul lows.

raders and investors have, thus, been forced to adopt an extremely selective approach. Despite that, we may watch he next week holds the current lows or …

On one higher degree, inside the a-b-c Flat developing inside D, as was argued much earlier, “c” could achieve anything from



8.2% to 161.8% ratio to “a” (Dec -Feb rally), price-wise, and consume minimum 50% time compared to “a” and “b” put togetheTime- price potential for “c” can be calculated accordingly. [“c” has now achieved 61.8% price-ratio to “a” and 50% time-rawith “a+b”].

We assumed larger D leg began from Dec‟11 (wave -count-wise from the 9th Jan‟12), and the same may be developing as a Fla

s “a” leg was a channeled Double Zigzag till Feb‟12, and “b” was a channeled Complex Corrective enclosing 2 Diametric

ormations.

lso, “b” corrected “a” by 80% price-wise, and by 161.8% time-wise. From 4th

Jun low of 15749 (Nifty 4770), Sensex is assumee forming “c” of the Flat, which should be the last “Impulsive” wave of a 3 -3-5 structure inside the Flat.

The 1st

rally from 4th Jun had retraced the last falling segment inside “b” in faster time, which justified our assumption of “c” of D

pwards.

Referring to one more larger-degree structure, we are assum ing the 14- month fall from Jan‟08 to Mar‟09 as A of a large 7-

egged Diametric . The 20- month rally from Mar‟09 to Nov‟10 is assumed as its B leg.

The 14- month fall from Nov‟10 to Dec‟11 was labeled the C leg of the larger Diametric, which was a well-channeled ComplCorrective involving two equal-sized correctives.

From Dec‟11 onwards, we are into the D leg, which is still on, developing as a “Flat”.

While the “orthodox” Wave Theory gives importance to 61.8% retracement level and calls it a “Golden Ratio”, NEoWave Theo

on siders 80% also as anot her impo rtant retracement level, especial ly after channeled moves.

s the chart below depicts, since Nov‟10 it has been generally useful to consider 61.8% to 80% retracement area as crucor terminating c orrective phases. It wo rked this tim e as wel l .



The D leg which commenced from 9th Jan, and is developing as a “Flat”, wherein, by the definition of a Flat, “a” is non-impulsiv

nd “b” corrects more than 61.8% of “a”. It did 80%. Once “b” is over, “c” should move higher as an Impulse move, but cae a Termin al, a special type of Impu lse.

We had earlier suspected that the higher degree C leg from Nov‟10 downwards ended on 9th Jan‟12 as a Double

ombinat ion. This leg was also well-channeled, and enclosed a Neutral Triangle (from Nov‟10 to Jun‟11) and Contracting Triafrom Jul‟11 to Jan‟12).

s we also observed, the 1 st and 2

nd correctiv e were exactly equal price-wise, both m easured almost exactly 3800 Sens

oints . This discussion was chartically presented on the Weekly chart of Sensex given below.



By NEoWave logics, most channeled moves enclose Complex Corrective structures involving “x” waves, and carry a

attern implication of 80%.

fter breaking the 14-month long channel (from Nov‟10), we suspected that current ral ly has po tential to be marked as D le

much larger Triangle or Diametric from „2008. This option was preferable because C leg from Nov‟10 was not anmpulse. A Non-impulsive C leg could only be part of a larger Triangle or Diametric.

nside this, the larger A leg was from Jan‟2008 to Mar‟2009. The B leg was from Mar‟2009 to Nov‟2010. The C leg camedown from Nov‟2010 to Dec‟2011, as a channeled fall (Complex Corrective) with two equal standard correctives.

While A and B were equal price-wise, C achieved tim e-equal i ty (14 month s) with A . The long-term Diametric picture washown on the chart below :



y NEoWave logics, D leg of a Triangle or Diametric c an retrace minim um 50%, or ideal ly 61.8%, of the C leg. D of a

Triangle or Diametric can even retrace as much as 80% or more of C leg. However, if our assumption of larger formation from2008 being Triangle or Diametric is true, D could remain smaller than C, i.e. not cross Nov‟10 high of 21109. See the D lemarked during „1996 -97 on the chart.

One may also note that the D leg dur ing „1996 - 97 corrected 98% of C, and internally developed as a Flat, wherein “b” hetraced “a” completely.

We can see both the D legs as m arked in Purp le squares for the comp ar ison . The current meandering ph ase of the

market may be because m arket is fo rming D leg, which is the middle, “Contracting” portion of the larger Diametric ormat ion.

Yearly lows

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

s the past instances would s how, once the year ly low gets broken, a min imum of 20% cut from the low has been a u

henomeno n, though g radual ly. A 20% magnitud e reduced from 15652 would calculate to about 12500 for Sensex.

This leve l matches wi th th e huge gap-up act ion (refer to Weekly chart d iscussing 32- week cycle) seen during the „200



The chart given below shows equidistant parallel lines enclosing the development since Nov‟10. Further, it shows how

Sensex respected most of i ts important lows as resis tances la ter.

Sensex was seen testing levels clos er to 15750, which w as marked as cruc ial on the chart.

Sensex recently recov ered nearly 14% exactly from this level, and is n ow t esting 17800/17300 levels marked on th e ch



2-Week time cy cle

The development since Mar‟09 has followed a 32-week tim e cycle , as shown on the chart below.

This had ra ised a poss ib i l i ty that an important low was may be form ed around 20 th Aug. Sensex respond ed by hi t t ing

o t tom on 26 th Aug.

This also ra ised the possib i l i ty of an upw ard/s ideways phase that could survive for 32 weeks from Aug‟11, and end ein 4

th Feb‟12 or 31

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

Feb‟12 as per this cycle.

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

s we already know, Extract ing Tr iangle is a pattern w hich sho ws smal ler ral l ies and bigg er drops. Thus in one directionhows e < c < a, and in the opposite direction, it shows d > b.

On one higher degree, Extracting Triangle (from Mar‟09) would make up the larger B leg from Mar‟09 lows of 8047, whicorrectin g the 14-mo nth long A leg from Jan‟08 to Mar‟09.

Time-wise, this B leg ending Feb- Mar‟12 would consume as much as 261.8% time compared to A, before C leg of thequivalent degree goes down.



This is an extremely b earish pictu re, alternative to the larger Diametric scenario dis cus sed earl ier, wherein C can fal l

est even Oct‟2008 lows.

bove 18000, Right Shoulder become bigger that the Left Shoulder , which m ay appear re ject ing the Head & sho ulders

Extracting Triangle” argument. However, the 32 -week time cycle also match es with the 2-year cyc le (already dis cuss

nd m ay therefore be watched.

The Sensex was seen testing the “Neckline” shown on the chart, which did prove crucial, as Sensex bounced 14% frohe Neckl ine.

no ther idea would be to m ark the entire development as a Diametric , instead of Extractin g Triangle, and the same is

ow marked on the chart . These assumpt ions ind icate an incomp lete B, but conf i rms only on faster drop below the

Neckl ine, wh ich is sti l l awaited.

Al l major tops are character ized by 30% drop from the top value. This is n ormal not only ins ide a bear phase, but is

ommo nly seen even inside a bul l phase too. The 30% taken out from the cur rent top value on Sensex (21109) wou ld

ess th an 14800.

The total loss s o far, from t he high o f 21109 to 15425, measures around 28% so far . However, on B SE Small-Cap and

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

Overal l , it was argued much ear l ier , that we would see a topping format ion sp read ov er 2-3 month per iod beginn ing

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



Comparison with Jan'08 top formation

We compared the „2010 topping formation to the movement from Oct‟07 to Jan‟08 , a 2.5 month period ju s t bef o re the hf 21206 was hit on Sens ex. This was also an extremely volati le period of nearly two months, just before the market actual

opped out.

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

One may observe the volatile development once it reached closer to the upper parallel. Inside this volatility, the market faced umber 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 was seen testing the lower Bl ue parall el, fr om where it bounced recently.



450-point Grid chart for the Sensex

ensex has been fol low ing a Grid of 2450- 2500 points since „2008 . These Grids are shown on the Weekly chart of Sensexelow. One can find a bottom or a top getting formed at each of the Grid levels.

Thoug h the Grid level around 15300 did pr ove sup port lately, Index is n ow t esting th e 17800, the grid level marked on

pside.



Our markets, remember, has seen mu lti fo ld ral l ies previously , each time con tinuin g for abou t 4 (four) years, after which

sual ly enters a m ul t i -year consol idat ion phase . In other words, “long - term” has always meant 4 years in Indian conte

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

n „2008, it completed another 4- year rally from „2003, during which Sensex rose 7 -fold from 3000 levels to 21000. It m a

ow co nsolidate for 7 year, beginning „2008, preferably forming as a Triangle or Diametric.

We explained that the 14- month fall from Jan‟08 was a Triple Combination “A” leg of a large multi -year con sol idation .orrective phase beginning Mar‟09 retraced about 99% of the previous fal l from 21206 (Jan‟09) to 8867 (Mar‟09), (which

abeled as a Triple Combination). The longer time required while rallying is symptomatic of its corrective label of “B”.

The ral ly from 8047 (actual ly b eginning at 8867) was, the refore, considered as the “B” leg. The next leg downwards wo

e labeled as “C”. Such a-b- c development since Jan‟08 would be considered part of the 2

nd

wave of wh at appears asrob able Terminal beginning „2003.

Even though we saw the m arket reaching levels above Jan‟08 highs, the multi -year cons ol idation is expected to shapke a large decade-long Diametric , looking similar to the consolidation we saw from „1992 to „2003. Our trad ing/investmen

tra teg ies should be designed accord ing ly .

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

wave with in the larger 5 th wave. This 5

thwave is

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



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, Term

evelopm ent 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, '19

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 undeparate 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 ther eafter, in '1992 and '2000 . Both these turning points wmarked by stock market scams, because of which, the leaders of the rally had extremely difficult time later. For example, ACC,eading stock of '1992 bull market, remained below its highs till end of '2004. Similarly, the IT stocks, which were leaders of '20ally, lost as much as 90% of their top valuations by the year '2003.

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

n the previous 8-year cycle top during „1992, Sensex lost 57% from 4546 to 1980 . In the next cycle top, the cut was almos

8% from 6150 in „2000 to 2594 in „2001 .

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

hase, time-wise. The price-time targets were achieved as Sensex dropped 63% from 21206 to 7697. The yearly channel, shoelow, which was used earlier to project 20000 level for the Sensex during „2007, was broken when the Index moved below 17reak of th is long- term channel a lso weighed in favor of a larger correct ive phase fo l lowing th is 8-year cycle .



ppendix : Lo ng-term s cenar ios for Sensex

s 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 last orrective within this Complex Corrective phase formed as a "Non-Limiting" Running Triangle. This has been my preferred cenario for many years, which I had assumed to be under development since I began long- term forecasting during „1997 -„199

This one was the basis of “Forecast for the 21st Century” article published in Business Standard (which can be read on

ivekpatil.com).

This scenario also combines well with the traditional channeling technique. Sensex followed a parallel channel for 11 long yearrom Apr'1992 to May'2003. As I had shown, if one projects the width of this channel on upper side, such a projection also gave0000 as the “minimum” target. Thi s forecast was achieved. This scenario is shown on the chart given below :

s per my second alternative, a Super-Cycle-Degree 3rd

(or 5 th ) began since Nov‟84. Its internal 3

rd was an “extended” leg, whi

chieved 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”Terminal”, because its lower -degree 1

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

mpulse”).

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 3rd valwise, 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 5th woue 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 combinwo Triangular patterns, one initially “Contracting” up to the "d" leg, followed by an “Expanding” one. The contraction point is theg, and the legs on either sides of it tend to be equal. Accordingly, "c" and "e" were equal in "log scale", both showing about 60ains. 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 in the

eg, larger 5 th

could be developing as a Terminal. Since „2008, we are into its 2nd wave, which could continue to develop over 8ears from „2008.

The "Double Extension" scenario was also shown on following ASA Long-term Index (chart below). I've created this chart ombining 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 thamarket is into the lower-degree 5th of the SC-degree 3

rd or 5

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

chieve even 50000+.

break of 2-4 line would confirm the Terminal development inside the 5 th, and would therefore, restrict the upsides to much lo

evels than 50K, but end surely above 21000.

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

rd wi l l have to change to 5

th , because only a 5

th of the 5

th

e a Terminal. The Super-Cycle-Degree marking f or 1 st and 3

rd shown , would then change to 3

rd and 4

th respectively, a

hown in Whi te.



Disclaimer : These notes/comments have been prepared solely to educate those who are interested in the useful application ofechnical Analysis. While due care has been taken in preparing these notes/comments, no responsibility can be or is assumedny consequences resulting out of acting on them.

Weekly Technical Analysi 3rd Sep 2012

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