Weekly Technical Analysis 15th July 2013

7/27/2019 Weekly Technical Analysis 15th July 2013

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Weekly Technical Analysis 15 July 2013 - By Vivek Patil, India's foremost expert in Elliot Wave Analysis

Sensex adds 2.3%, breaks previous resistance near 19600-700. Global markets rebound as Fed Chief hints at accommodative monetary policy. IIP contracted 1.6% in 'May, while retail inflation accelerated to 9.87%. Rupee breaches 61-mark, cools down later. India's Forex reserves at 3-year lows. IMF cuts India's growth forecast by 0.2% to 5.6%. Slowdown forces auto-makers to cut down production. Bumper Q1 numbers force re-rating of Infosys, stock gains over 10%. Nine serial blasts hit Mahabodhi Temple complex in Bodh Gaya. SC rules immediate disqualification of convicted elected law-makers.

Top Stories of the Week

"c" continues, break above 19600-700 marked c-leg of Zigzag

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

Last week we discussed, highs of Monday and Friday both were almost exactly the 61.8% calculation. This levelis also close to 19600- 700 area In the last two months, we can see many turning points in and around19600-700 (Nifty 5925- 75) area we may consider it as a crucial area to watch in the coming week strength above 19600- 700 could be considered continuation of c leg, which could then retrace b by asmuch as 80% Until we see a clear and decisive break above 19600 -700 area, we cannot rule out market toexperience pressure

Monday saw the Sensex reacting further lower from 19600-700 area. Down by over 300 pts, however, it hitthe lowest point of the week at 19186 on Monday itself. Lackluster till Wednesday, Index bounced back onThursday and Friday, broke above 19600-700 area, and finished 462 pts or 2.3% higher for the week. Theout-performance came from IT, thanks mainly to Infosys (up 14%), and Capital Goods. However, the Auto Indexunder-performed and shaved off 2.25%. Sensex formed a Bull candle for the week, but with lower volume-support.


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As shown on the chart above, on one higher degree, the Contracting Triangle from Apr13 is considered asb - wave inside the larger E (from Jan13).

The E from Jan13 is assumed to be part of the larger Diametric from 2008 onwards, as shown on the chart below :


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The market, in the meanwhile, continues to be selective. The main ind ices have been con t ro l led by the ones who c an move the heavyweights . We had mentioned swaying prowess of ITC recently, wh ich created a Higher High on Sensex in May13, but not on broader Indices or Dollar -based Indices .

Indeed, while Sensex traded near to its highest levels, the BSE Sm all-Cap Index traded n ear the levels i t closed the year 2005, i.e. 8 -year o ld l eve ls , which s hows the smal l inves tor s t i l l r emains in a t igh t spo t .

The Sensex has reacted low er from t he Grid level at 20250 for the 2 nd t ime th is year. The effect iveness of VPs Grid System was shown on the chart below. Since 2008, these Grid levels did prove important tu rn ing po in t s fo r the m arke t.


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S ince legs of Diametr ic as well as Extract ing Triangle formation s are except ions to NEoW ave rules , the t rad ing envi ronment remains cha l leng ing .

Under Wave Theory, the standard c orrect ives are Zigzag, Flat and Triang le . Though not mentioned in GlennNeelys Book Mastering Elliott, a 7-legged Diametr ic is also con sidered one co mp lete label-3 correct ive .

A Diametric is a very t radable pat tern once identif ied correct ly , like we did from Feb13 to Apr13. Itsidentification symp toms inc luded t ime-s imi la r i ty amids t i t s in te rna l l egs , and sub -normal b -wave in respon se to label-3 pat tern in a-wave .

Since Diametric is absent from the book, many seem to ignore its existence. It is basically made-up of twoTriangles.

While Contracting Triangle followed by Expanding Triangle would shape-up as Bow-Tie Diametric, Expanding Triangle followed by Contracting Triangle would shape- up as Diamond -Shaped Diametric.

Multi-Year long Diametric Formation

It was argued that all mul t i - fo ld ra ll i es w ould be fo l low ed by m ul t i -year long conso l ida tions . Sensex,remember, rose 11- fold during 1988 to 1992, but entered a 11-year consolidation thereafter.

Again, during 2003 to 2008 it multiplied 7 times. Drawing similarity, it could a 7 -year consolidation starting 2008.Further, the cons olidat ion, may sh ape up l ike a 7-legged Diametr ic , similar to the consolidation seen from


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1992 to 2003.

The Diametric formation from 2008 is also suspected because each of i ts intern al legs, except B, have consum ed about 13 month s so far. So, the E wave from Jan13 could also continue for about 13 months,and end som ewhere around Feb- Mar14 .

This long- term p ic ture was f i s t pu b l i shed on 6 th Feb2012 , with both D legs highlighted in Purple color rectangles. In the previous instance, the D leg during 1996 -97 had retraced as much as 97% of its preceding C leg. In the current instance, D retraced 84% of C.

L o n g - term corrective phase on Dows chart from the year '2000 onwards also appears to be a probable 7- legged Diametr ic . Instead of Bow -Tie Diametric on Sensex, Dows Diametric is shaping up as Diamond - Shaped Diametric.

Jan-Mar Topping Cycle

During Dec12, it was pointed out that major tops occur red dur ing Jan-Mar per iod in the l as t 13 years .

More than half the times, the top also occurred during the month of January . Based on this, it was argued that Sensex could hit a major top during Jan13, and it did.


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T his cycle may be the result of NAV pop-up exercise in the last month of the Calendar Year. Jan13 was the 7 th such top forming in the month of Jan.

Performance of the Broader Market

The broader m arket has, general ly, und er- performed the main Index since the year 2008 , as can be checked on the chart below.


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Indeed, the broader Mid-Cap and Small-Cap Indices have also broken 0-b lines (Red color lines) of the upward Dleg. The Small-cap Index ev en broke its Jun12 levels, and gave a faster retracement to the c part of post -Dec11rally.

Indeed, while the Sensex i tself retraced 89% of i t preceding 13- month fall from Nov10 to Dec11, BSE Small-Cap Index retraced on ly 38.2%, and h as, in fact , reacted h eavily from this retracem ent level .

The divergence between Sensex and broader mark et appears to be Index m anagement act ivi ty, as the Sensex i s h e ld by the Index heavy-weigh ts , whi le the b roader shows d i s t r ibu t ion . This whole th ing ,however, made for a t r i cky and un comfo r tab le trad ing envi ronment .

NEoWave Discussions

Inside the D leg from Dec11 to Jan13, we had had assumed a 3 -legged a-b- c Flat. The c part was a 5 -legged Impulse, inside which, 5 th leg (beginning Nov12) was assumed to be a Terminal.

Based on NEoWave requirements, it was argued that Sensex would drop below Nov12 lows in 50% time of the 48- day long Terminal. Index eventually did drop below Nov12, but took 48 day or 100% time (inst ead of 50%).

As an abundant precaution, therefore, fol low ing al ternate wave-struct ure was sugg ested for the D leg from Dec11.


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In the alternate scenario, c ended at Oct12 high, and it was equal to a leg. The d was the smallest segment, and e (i.e. po st- Nov12 rally) was a Double Combination which ended in Jan13.

The pos t - Nov12 rally is retraced by 100% on Sensex, but more than 100% on broader indices. The larger picture of Diametric from 2008 onwards is, therefore, considered probable.

That would mean 13-month long D- leg has ended at Jan13 highs, and 13 -month long E-leg started thereafter.

NEoWave, remember, allows exceptions to rules at important market turning points or under unusual condi t ions , like end of larger patterns or last wave, such as a Terminal.

Also, Triangles and Terminals are exceptions to v ir tual ly al l rules . Since Diametr ic pat tern is m ade up of Triangles, NEoWave Exception Rule is also applicable to these patterns .

Since we were at an imp or tan t tu rn ing po in t in Jan13, and dealing with Terminal and legs of Diametric,perhaps pa t te rn im pl ica t ion ru les cou ld no t b e sa t i s f ied to the fu l l ex ten t .

Does i t real ly matter wheth er the Sensex achieves the pat tern implic at ion accurately with in the t ime-pric e parameters , when the general direct ion of the secular market has been largely -ve as we sus pected sinc e Dec12 ?

As we argued, the larger bear phase is already v isible in the broader m arket . Since Dec12 we turned cautiousas the rallies were getting smaller (shap ing into a Terminal), and also because of the Jan -topping cycle (discussed separately).


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Terminal we assumed from Nov12 to Jan13, is a special kind of Impulse which occurs in the last wavepos i t ion , i.e. either as c of Flat/Zigzag or 5 th of an 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 Term inal would develop as a 3-legged o r 5- legged corrective structure, like aFlat , Zigzag or Triangle . Also, 4 th of Terminal must enter the area covered by the 2 nd (Overlap Rule).

A l ine s imilar to th e 2-4 l ine on Sensex can also be drawn on th e broader indices, and the sam e has been brok en (as discus sed separately).

Sensex, consu med 59 weeks to retrace 84% of i ts preceding 13-mo nth fal l , which also was a 59-week affair , as shown on the chart below :

The ral ly, accord ingly, was con sidered slow er, corr ect ive s tructu re as per NEoWave, and no t as part of any fresh ral ly.

The channel enclosing the a-b-c Flat insid e the larger D leg from Dec2011 onwards was shown on the chart below :


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The 80% retracement level was consid ered and m arked as a pat tern imp licat ion for the 13-mont h long Double Combina t ion mov e marked as C . Pa t tern imp l icat ions , however, cannot be s t r i c t ly enforced for the legs of Triangle and Diametr ic , whic h are exception s to the general rules .

As per NEoWave, most channeled moves enclose a Complex Corrective structure involving x wave. Complex Corrective involving 2 correctives, joined by one x wave, is called a Double Combination, and carries apa t tern imp l icat ion of no t m ore than about 80%.

Note that the C leg of Sensex, from Nov10 to Dec11, was a Double Combination, with two equal -sized correct iv es (see weekly ch art given above), and th erefore, carr ied a pat tern implicat ion of 80% retracement by th e D leg.

Further, as depicted on the chart below, since Nov10, it has been generally useful to consider 61.8% to 80%retracement area as crucial for terminat ing m oves .


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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 is also a 3 -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 draw a line joining 0 and b (0 -b line), and take a parallel from the a point. The c leg should normally end near such parallel. The channel indicates s im ilar i ty of i ts 3 internal legs, reason w hy Flats are cal led Flats .

Inside c of D (beginning Jun12) for Sensex , we were expect ing 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. achieve161.8% ratio to the next largest leg.

Since 1 st and 3 rd were normal, we could have projected 5 th wave Extension. However, such a move would project values slightly above the Nov10 highs, which would jeopardize the larger assumption of Bow -Tie shaped Diametric from 2008 onwards.

We, therefore, preferred 5 th of c not to achieve 161.8% ratio, but terminate below Nov10 highs, fromwhere a downward E would open . Since E begins the expanding phase of the Bow -Tie Diametric, it would break below Dec11 lows.

The 1 st and 3 rd 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 Dec12 or near to it.


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As the beg inn ing par t o f 5 th shows v io lence on ups ide , we suspec ted 5 th cou ld develop internal ly as a 1 st Ex tens ion Impulse o r Termina l. Si nce a Terminal always occurs at major turning point, it would be able togenerate the necessary downside power for the larger E leg.

In the 7- legged Bow - Tie shaped Diametric from 2008, one can see a reduction in magnitude from A leg to D leg. The D leg is the smallest segm ent of the Bo w-Tie shaped Diametr ic .

The other half of this Diametr ic , i .e . E-F-G legs, should sh ow expand ing m agnitud es , and therefore, E should become larger than the D leg. This can happen only when E breaks the bottom Dec2011.

After breaking the 13- month long channeled C (from Nov10 to Dec11), we had suspected that deve lopment pos t Dec11 has potential only to be marked as D leg of a much larger Triangle or Diametric from 2008.

This opt io n was preferable because C leg from Nov10 was not an Impulse. A Non-impulsive C leg could only be part of a larger Triangle or Diametric.

BSE Dollex-30 Index

Meanwhile, since the FII activity turned a prominent factor in the Indian stock market, we examined thedevelopment of BSE Dollex-30 Index, which sh ow ed a Head & Shoulders fo rmation around Oct12 on its Daily chart.

Its downsides later achieved the Head-to-Neckline project ion on dow nside , as we expected. Since the project ion level also m atched with i ts 200-day EMA, we suspected so me pull-back. I t did pull back t i l l Jan13.

During Apr13, this Index protected its Nov12 lows, and bounced back. It has now reacted lower from the80% retracement level to Jan-Ap r fal l , and has no w below the cruc ial 200-day EMA o nce again.


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From one higher- degree perspective, the Oct12 formation looks like the Left Shoulder of a bigger Head & Shoulders formation, with Jan13 as its Head .

The top during May13 looks like the Right Shoulder of the bigger H&S formation, the Neckline of which, isn o w b r o k en .

The recent pul l- backs are seen testing the Neckline for the second time.

Yearly lows

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

As the pas t ins tances wo uld show , once the year ly low ge t s b roken , a min imum of 20% cu t f rom the low has been a usual pheno meno n, though gr adually. A 20% magnitud e reduc ed from 15652 would calculate to about 12500 for Sensex.

This l evel has no t been touched so fa r, bu t sh ould be rememb ered as a c ruc ia l l eve l which m atches wi th the huge gap-up act ion (refer to the Weekly ch art discus sing 32- week cycle) seen during the 2009.


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32-Week time cycle

T he development since Mar09 has followed a 32 -week t im e cycle , as shown on the chart below.


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Th is was used for ra i s ing a poss ib i l i ty tha t an impor tan t low w ould be fo rmed a round 20 th Aug11. Sensex responded by h i t t ing the bo t tom o n 26 th A u g .

This cyc le had a l so ra i sed the poss ib i l i ty o f an up ward /s ideways ph ase that cou ld surv ive fo r 32 weeks from Aug11, and end either on 4 th Feb12 or 31 st Mar12, developing as a ranged movement like the Left Shoulder. The upward phase ended during Feb12 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 possible Extracting Triangle, which would remain smaller than the c leg. The e leg did remainsmal le r as susp ec ted .

As we already know, Ext rac t ing Tr iang le i s a pa t te rn which s how s sm al le r ra l li es and b igger d rops . Thus inone direction, it shows e < c < a, and in the opposite direction, it shows d > b.

Above 18000, Right Shou lder became bigger that the Left Should er, whic h appeared reject ing th e Head & shoulders or Extracting Triangle argument. However, the 32 -week t ime cycle may remain val id as a cycle even f rom here .

The Sensex was seen testing the Neckline shown on the chart, which did prove crucial, as Sensex bounced several t imes f ro m the Neckl ine.

Ano ther idea would be to m ark the ent ire developm ent as a Diametr ic , instead of Extract ing Triangle, and the same i s now m arked on the char t . These assum pt ions ind ica te an incom ple te B , bu t conf i rm s on ly o n faster drop below the Neckline, wh ich is s t i l l awaited.


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Recent recovery happens to be exact ly at 32-week cycle turning poin t .

30% Principle

Al l major tops a re charac te r ized by 30% drop f rom the top va lue . This i s no rmal no t o n ly ins ide a bear phase , bu t i s comm only s een even ins ide a bu l l phase too . The 30% taken ou t f rom the cur ren t top va lue on Sensex (21109) wou ld b e less th an 14800.

The total loss s o far, f rom th e high of 21109 to 15425, measures arou nd 28% so far . However, o n B S E Small- Cap and MidCap Index, the loss from 2010 high does measure more than 30% .

Overal l , i t was argued m uch earl ier, that we wou ld see a topp ing form ation spread ov er 2-3 month p eriod beginning Oct10. This played out well as suspected. Indeed, as was observed, 60% of stocks topped out during Oct10 itself, and many have already shaved off much more than 30%, though Sensex itself shaved off on ly 28%.

Comparison with Jan'08 top formation

We compared the 2010 topping formation to the movement from Oct07 to Jan08 , a 2.5 month period ju s t before the high o f 21206 was hi t on Sensex. This was also an extremely volat i le period of nearly two months,


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ust before the market actually topped out.

The following chart of 2008 period shows two equidistant parallel channels. The Sensex broke above theoriginal ch annel and achieved an equidistant h eight at the upp er paral lel , before react ing low er into a bear phase.

One may observe the volatile development once it reached closer to the upper parallel. Inside this volatility, themarket faced number of sell- offs beginning Oct07, before it finally topped on 8 th Jan08.

A similarity can be drawn for the 2010 top formation with the developments of 2008, as shown below.


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2450-point Grid chart for the SensexSensex has been fol low ing 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 getting formed at each of the Grid levels.

Index is now react ing fro m th e Grid level at 20250.


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The larger picture

Our markets, remember, has seen mul t i fo ld ra l l i es p rev ious ly, each t ime con t inu ing for about 4 ( four ) years ,af ter which, i t usu al ly enters a mult i -year conso lidat ion phase . In other words, long - term has alwaysmeant 4 years in Indian co ntext .

Remember, Sensex rallied 11 - fold from 390 (Mar88) to 4546 (Apr92) in four years, after which it conso l ida ted 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 a Triangle or Diametric.

We explained that the 14- month fall from Jan08 was a Triple Combination A leg of a large multi -year

consolidation. The corrective phase beginning Mar09 retraced about 99% of the previous fall from 21206 (Jan09) to 8867 (Mar09), (which was labeled a s a Triple Combination). The longer t ime required wh ile rallying is symptomatic of its corrective label of B.

The rally from 8047 (actually beginning at 8867) was, therefore, considered as 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 2 nd wave of wh at appears as a probable Terminal beginning 2003.

Even though we saw the market reaching levels above Jan08 highs, the multi -year conso lidat ion is expected to sh ape up l ike a large decade-long Diam etr ic , looking similar to the consolidation we saw from


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1992 to 2003. Our t rad ing / inves tment s t ra teg ies should be des igned accord ing ly.

The suspected corrective phase beginning Jan08 would be the 2 nd wave within t he larger 5 th wave . This 5 th

wave is suspected to be fo rming as a Termina l due to absence of impuls ive behavior in i t s in te rna l 1 st wave The Terminal confirms 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, Terminal developm ent usual 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 thechart below, '1984 was the beginn ing o f 8-year long bull-run t i l l '1992. In our Super-Cycle Degree count, shownon ASA Long- Term chart under a separate paragraph, weve considered 1984 as the beginning point for the most dynamic 3rd wave.

The next two impor tan t tu rn ing po in t s occu r red exac t ly 8 years thereaft er, in '1992 and '2000 . Both theseturning points were marked by stock market scams, because of which, the leaders of the rally had extremely difficult time later. For example, ACC, the leading stock of '1992 bull market, remained below its highs till end of '2004. Similarly, the IT stocks, which were leaders of '2000 rally, lost as much as 90% of their top valuations by theyear '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 during 1992, Sensex lost 57% from 4546 to 1980 . In the next cycle top, the cu t was almost 58% 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 m i n i m u m o f 1 3 mon ths in to bear phase , time-wise. The price-time targets were achieved as Sensex dropped 63% from 21206 to7697. The yearly channel, shown below, which was used earlier to project 20000 level for the Sensex during 2007,was broken when the Index moved below 17200. Break of th i s long - term ch anne l al so w eighed in favor o f a larger correct ive phase fol lowin g this 8-year cycle.


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App endix : Super-Cycle-degree Wave-scenarios for Sensex

For Super-Cycle-Degree wave-scenario, consider following ASA Long-Term Index. This Index has been created by combining a very old Index compiled by a British advisor (from '1938 to '1945), with RBI Index ('1945 to '1969), F.E Index ('1969 to '1980) and Sensex (thereafter till date).


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The wave-count presented shows that the market is into the lower-degree 5th of the SC-degree 3 rd or 5 th wave.

The detailed wave- count from 1984 onwards can be seen on the Monthly chart given below. The 2 -4 line shownon the ASA long-term Chart above, and Monthly chart below, would determine if the post 1984 Impulse is a Super cycle-degree 3 rd or 5 th.


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Super-Cycle-Degree 3 rd (or 5 th ) began since Nov84. Its internal 3 rd was an extended leg, which achieved exactly 261.8% ratio to the 1 st on log scale. The Sensex is now forming the 5 th Wave, and the same could develop as aTerminal, because its lower -degree 1 st wave from May03 onwards developed as a Diametric (which is acorrective 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 4th was 38.2% of 3rd value-wise, and 261.8% time-wise.

While the 4 th is shown as a 3-legged a-b-c Flat on the monthly chart above. Alternatively, the 4 th is shown as a 7-legged a-b-c-d-e-f-g Bow-Tie Diametric on the Monthly chart below. The chart below also shows 11-year parallel channel from Apr'1992 to May'2003. As shown, if one projects the width of this channel on upper side, such a

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


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.

As mentioned above, the lower-degree 1 st from May2003 to Jan2008 appears to be a Bow -Tie Diametric, marked

as a-b-c-d-e-f-g. It is called "Diametric" because it combines two Triangular patterns, one initially Contracting upto 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 is considered to be the 1st wave of the Impuse. Due to thecorrective structure in the 1 st leg, the higher-degree 5 th could be developing as a Terminal. Since 2008, we are intoits 2nd wave, which could continue to develop over a period of 7-8 year s beginning 2008.


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As per NEoWave, break of 2-4 line confirms a Terminal development, and If the 5 th proves to be a Terminal, theSuper-Cycle-degree label of 3 rd will have to change to 5 th, because only a 5 th of a 3 rd cannot be a Terminal. Only a5 th of the 5 th can be a Terminal. The Super-Cycle-Degree marking for 1 st and 2 nd as shown on ASA long-term chart,would then change to 3 rd and 4 th respectively.

Disclaimer : These notes/comments have been prepared solely to educate those who are interested in the usefulapplication of Technical Analysis. While due care has been taken in preparing these notes/comments, noresponsibility can be or is assumed for any consequences resulting out of acting on them.

Weekly Technical Analysis 15th July 2013

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