Weekly Technical Analysis 7TH JAN 2013

7/28/2019 Weekly Technical Analysis 7TH JAN 2013

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Weekly Technical Analysis

January 07,2013

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

Sensex gains 1.75% for the week, forms a Bull candle for '2012, ranged inside '2011. Current account deficit widens to a record high during 'Sep quarter. Core sector growth dips to 1.8% during 'Nov. Govt rolls out direct cash transfer scheme in the new year. Services PMI rises to 3-month highs.

Top Stories of the Week

ensex breaks 2-week high, gains 1.75%, 2nd target can be upgraded to 19900-20000

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, So far, 2nd

had corrected the 1st

by only 38.2% price-wise, and about 100% time-wise we will opeownsides towards 50% retracement levels only if the action weakens below 4-week lows traders have been forced t

emain in a trading mode for the 4th

week running. Index cannot remain in such a range for a long time, and would break iventually For an upside break, the crucial levels could be the 2-week highs of 19504-21 Upside break would be

abeled as the 3rd

, which could remain smaller than the 1st

because we are assuming possibility of 1st

Extension Impulse insidhe larger 5

thwave of c of D.

ubdued on Monday, Sensex broke the 2-week highs on Tuesday with a gap-up action. Following up with a bigger gapction on Wednesday, Index touched 19797 by Friday, and ended 339 pts or 1.75% higher for the week. While Realty an

Oil&Gas Indexes outperformed with 4 to 5% gains, FMCG Index cooled down by 0.8%. Sensex formed a Bull candle for theweek, touching 20-month high. Break above the 2-week highs is marked as 3

rdof the 5

thas argued.


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ast weeks high of 19797 was just 3 points short of our 2nd

target area of 19800-900. We had set this as our 2nd

target a

bout a month ago. Index achieved the 1st

target of 19400-500 in the meanwhile.

Both 19400-500 and 19800-900 were nothing but the upper value of the channel drawn around the larger D leg fromDec2011 lows. To show the channel around the Flat inside D, a line from Feb12 high was drawn parallel to the line joiningDec11 and Jun12 lows.It was argued that c of a Flat inside D can end at the upper channel line.

ndex is now forming the 5th

inside the c since Nov lows. Since the channel around D (from Dec11) is a rising channel, itspper line value for Jan13 would now value at 19900-20000(which during Dec12 valued at 19800-900 on log-scale). Wean, technically, upgrade the target to 19900-20000.

was also argued that the 5thof c (from Nov low) could develop as a 1

stExtension Impulse or Terminal. An Impulse is a 5-

egged pattern. Index is already into 3rd

of the impulsive 5th. Further. c is the last leg of a Flat.

As argued earlier, since 2000, top was achieved during the month of Jan in 7 out of 13 years, and in Feb in 4 years. In ases, the top was hit in the month of March.It was only during 2006 that Index avoided topping out during Jan -Mar perio

he year.

ndex is still moving higher price-wise, but the above time analysis tells us we may reach the top anytime soon. While we cechnically upgrade the upside target from 19800-900 to 19900-20000, as explained above, we may take required care.

Confirmation of the actual top would require faster retracement of the last rising segment, i.e. 5th

leg inside 5thof c. (The c

egins from Jun lows, the 5thof c begins from Nov lows.)


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was also argued that 5tof c could develop as a 1

stExtension Impulse or Terminal. Its shape would look like a Diagonal

riangle or Wedge pointing upwards.

We had argued thatsince the year 2000, except for 2001, the month of Dec always created a Bull candle. However, it aed to matur i ty of the ra l ly in th e next 1-3 month s.

ndex did form a Bull candle for the month of Dec2012 . It also formed a Bull candle for the year 2012, the high of whichemained enclosed inside the high-low range of previous year of 2011.

he larger D leg from Dec2011 is now into 13th

month, which is time equality with 13-month time consumed by the preceding Ceg from Nov2010 to Dec2011.

n a similar time, D has retraced only about 78% of C. This only highlights the corrective nature of the post Dec2011ally, which we marked as D leg of the larger Diametric from the year 2008 onwards.

We said, the Index is currently forming internal c of larger D, which is developing as an Impulse. The 5th

of this Impulse is fromov12 lows, and the same may develop as a 1

stExtension Impulse or a Terminal.

s p er NEoWave, the break below 2-4 line for c would either indicate that the Impulse that started from Jun12 onwas over, OR the 5

this developing int o a Terminal.

nside a 1stExtension Im puls e, i ts lower-degree 1

stwou ld be the largest ral ly, and 3

rdand 5

thwould show smal ler ral l ie

ecause of which the 5thof c would shape up like a Diagonal Triangle.

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

The new projection, shown on 17thSep12, is now exactly achieved at the upper end of the channel, price -wise and

me-wise. Can it achieve som ething more ?

Once we conf i rm opening of 3rd, we wi l l be looking for the 2

ndtarget area men tion ed at 19800-900. Since it is a rising

hannel, the log-scale parallel would now be valued at 19900-20000 (Nifty 6150-200) in the current month.


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s was mentioned, while on arithmetic scale the value of the upper parallel line was at about 19400-500, which w e ha

onsidered as our 1

st

targ et (Nifty 5950-6000), it com es to abo ut 19800-900 (Nifty 6100-6150) on log scale, which weonsidered as our 2

ndtarget.

On one more higher-degree, it was explained thatthe D leg from Dec11 onwards was part of a larger 7-legged Bow-TieDiametric.

his larger Diametric begins from 2008, and could develop similar to the Diametric formed during 1992 to 2003 , as whown on the Monthly chart of Sensex below :


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This long-term picture was fist published on 6thFeb2012, with both D legs highlighted in Purple color rectangles.

While the Upp er l ine of th e latest Rectangle was at 80% retracement level (Sensex 19800-900) to C leg, the Righ t l ine w

drawn at Dec12 (the current month). The Sensex is now close to the maturity levels shown by this projection, price -ws wel l as time-wise.

s per NEoWave, most channeled moves enclose a Complex Corrective structure involving xwave. Complex Correct ive

nvolving 2 correctives, joined by one x wave, is called a Double Combination, and carries a pattern implication of nmore than about 80%.

Note that the C leg from Nov10 to Dec11 was a Double Combination, with two equal-sized co rrectives (see weekly chabove), and th erefore, carr ied a pattern im pl ication of 80% retracement by the D leg.

urther, as depicted on the chart below, since Nov10, it has been generally useful to consider 61.8% to 80% retracement arearucial for terminating moves.


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This chart also shows 61.8% and 80% retracement level to the entire fall from Nov10 to Dec11 as maximum upside possibility

D leg.

Meanwhile, since the FII activity turned a prominent factor in the Indian stock market, we examined the development ofBSEDol lex-30 Index, which recently sh ow ed a Head & Shoulders fo rmationon its Daily chart.

s downsides laterachieved the Head-to-Neckl ine projection on dow nside, as we expected. Since the projection level almatch ed with i ts 200-day EMA, we susp ected some pul l -back to the Neckl ine.

One may also note thatwhile Sensex recently made a higher high compared to Oct12, Dollex-30 maintained a low er hig

s can be seen on the Dollex-30 chart below, the Index reacted dow nw ards from t he Neckl ine level. It has now broken thalling channel shown in Grey, and is testing the Green support line shown.


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s 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 als

-3-5 pattern where a and b carry corrective label of :3, and c is an impulse label of :5.

round 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 shouldormally end near such parallel. The channel indic ates simi lar i ty of i ts 3 internal legs, reason w hy Flats are cal led Flats.

Unless it proves to an Elongated Flat (a sub-type of Flat where c becomes longer in terms of time and price), wed initiallyssume any Flat to be a common Flat.

This could mean c may end either near 19400-500 (arithmetic-scale value of the parallel) or 19800-90 (log-scale value of thearallel).

Time-wise, Dec has always proved a +ve month since the 2000, except during 2001 and 2011. At the same time, except2006, all major/minor tops occurred during Dec-Mar period.

We cannot , therefore, rule out the 1-year long D-leg Flat from Dec11 would end dur ing th is per iod.

nside c of D (beginning Jun12), we were expecting a 5- legged Impu lse, because Flat is a 3-3-5 structure. As perNEoWave Extension rule, one of the directional leg inside an Impulse should get extended, i.e. achieve 161.8% ratio to the argest leg.

Since 1st

and 3rd

were normal, we can see a 5thwave extending inside c of D. However, such a move would project values

lightly above the Nov10 highs, which would jeopardize the larger assumption of Bow-Tie shaped Diametric from 2008 onwa


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Wed, therefore, prefer 5thof c not to achieve 161.8% ratio, but terminate below Nov10 highs, from where a downwar

would open.Since E begins the expanding phase of the Bow-Tie Diametric, it would break below Dec11 lows.

The 1st

and 3rd

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

to consume a similar time, and endomewhere in the month of Dec12 or near to it.

s the beginn ing part of 5th

shows vio lence on upside, 5th

cou ld develop internal ly as a 1st

Extension Impulse or TermSince a Terminal always occurs at major turning point, it would be able to generate the necessary downside power for the larE leg.

n a 7-legged Bow-Tie shaped Diametric, one can see a reduction in magnitude from A leg to D leg. The D leg is themallest segm ent of the Bow -Tie shaped Diametric.

The other half of this Diametric, i .e. E-F-G legs, sho uld sho w expandin g mag nitud es, and therefore, E should becomearger than the D leg. This can happen on ly wh en E breaks the bottom Dec2011.

fter breaking the 14-month long channeled C (from Nov10 to Dec11), we had suspected that development post Dec11 haotential to be marked as D leg of a much larger Triangle or Diametric from 2008.

This opt ion was preferab le because C leg from Nov10 was not an Impulse. A Non-impulsive C leg could only be part of aarger Triangle or Diametric.

nside D, b corrected a by 80% price-wise, and by 161.8% time-wise. From 4thJun low of 15749 (Nifty 4770), Sense

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

Since the 1st

leg looked strong, it was argued that the 5thof c could develop as a 1

stExtension Impulse, where rallies would g

maller. It was also said that 5thof c could even develop as a Terminal Impulse, if its 4

thoverlaps the area covered by 2

nd. Le

ee.

f we are currently dealing with only 1st

and 2nd

legs inside 5th

of c, the larger 5th

of c may stretch itself into next month. As wrgued, since 2000, most tops occurred during Dec-Mar period.

The final confirmation that 5thof c, and therefore the D leg is over would require faster drop below 18255 (Nifty 5548), as per

NEoWave requirements.

Yearly lows

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

s the past instances wo uld show , 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 wou ld calculate to abou t 12500 for Sensex.

This level has not been touched so far , but sh ould be rememb ered as a cruc ia l leve l which m atches wi th the hug e gap

ction (refer to the Weekly chart disc uss ing 32-week cycle) seen during t he 2009.


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2-Week time cy cle

The development since Mar09 has followed a 32-week tim e cycle, as shown on the chart below.


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This was used for ra is ing a possib i l i ty that an important low w ould be formed around 20thAug11. Sensexresponded

i t t ing the bottom on 26

th

Aug.

This cycle had also raised the possibility of an upward/sideways phase that could survive for 32 weeks from Aug11, and either on 4

thFeb12 or 31

stMar12, developing as a ranged movement like the Left Shoulder. The upward ph ase en

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 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.

bove 18000, Right Shou lder became bigger that the Left Should er, whic h appeared rejecting the Head & sho ulders orExtracting Triangle argument. However, the 32-week time cycle may remain val id as a cycle even from h ere.

The Sensex was seen testing the Neckline shown on the chart, whic h did prov e crucial , as Sensex bounc ed severalmes from the Neckl ine.

no ther idea would be to m ark the entire developm ent as a Diametric, instead of Extracting Triangle, and the same is

ow marked on the chart . These assumpt ions ind icate an incom plete B, but con f i rms only on faster drop below the

Neckl ine, wh ich is sti l l awaited.

The week ended 9thNov, how ever, com pleted the 32-week cycle, and Index has reacted as per this cy cle. That raises a


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uest ion whether the upw ard cycle is now over as per 32-week cycle .

0% Principle

Al l major top s are characterized by 30% drop from the top value. This is no rm al 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 th e high of 21109 to 15425, measures arou nd 28% so far. However, on B SE Small-Cap andMidCap Index, the loss from 2010 high does measure more than 30% .

Overal l , i t was argued mu ch earl ier, that we would see a topp ing form ation spread over 2-3 mo nth period begin ning

Oct10. This played out well as suspected. Indeed, as was observed, 60% of stocks topped out during Oct10 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 Oct07 to Jan08, a 2.5 month periodju s t bef o re the hf 21206 was hit on Sens ex. This was also an extremely volati le periodof nearly two months, just before the market actual

opped out.

The followingchart of 2008 period shows two equidistant parallel channels. The Sensex broke above the original chan


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nd 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 facedumber of sell-offs beginning Oct07, before it finally topped on 8

thJan08.

Asimilarity can be drawn for the 2010 top formation with the developments of 2008, as shown below.Sensex was seesting the low er Blue paral lel , from where it boun ced recently. It is now tradin g above the Blue paral lel , retesting it ag


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450-point Grid chart for the Sensex

Sensex 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 prove su ppo rt lately, Index is now breaking th e 17800 grid level.


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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 ph ase. In other words, long-term has always meant 4 years in Indian conte

Remember, Sensex rallied11-fold from 390 (Mar88) to 4546 (Apr92) in four years, after which itcon sol idated for 11 yearsrom 1992 to 2003.

n 2008, it completed anoth er 4-year rally from 2003, during which Sensex rose 7-fold from 3000 levels to 21000. It m aow 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 con sol idation .orrective phase beginning Mar09 retraced about 99% of the previous fallfrom 21206 (Jan09) to 8867 (Mar09), (which

abeled as a Triple Combination). The longer time required wh i le ral lying 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 wo

e labeled as C.Such a-b-c development since Jan08 would be considered part of the 2

nd

wave of wh at appears asrob able Terminalbeginning 2003.

Even though we saw the market reaching levels above Jan08 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/investmentra teg ies should be designed accord ing ly .

The suspected corrective phase beginning Jan08 would be the 2nd

wave with in the larger 5thwave. This 5

thwave is

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


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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, Termevelopm 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, weve considered 1984 as the beginning point for the most dynamic 3rd wave.

The next two important turn ing points occ urred exact ly 8 yearsther 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 almos8% from 6150 in 2000 to 2594 in 2001 .

We had, accordingly, targeted sub -10k levels for Sens exprice-wise during 2008-09, and a minimum of 13 months in to behase, 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 .


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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 lastorrective within this Complex Corrective phase formed as a "Non-Limiting" Running Triangle. This has been my preferredcenario 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 21stCentury 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. This forecast was achieved. This scenario is shown on the chart given below :

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

(or 5th) began since Nov84. Its internal 3

rdwas an extended leg, whi

chieved exactly 261.8% ratio to the 1st

on log scale. The Sensex is now forming its 5th

Wave, and the same is likely to developTerminal, because its lower-degree 1

stwave since May03 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.


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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 woule extended waves. This scenario is shown on the the chart given below :

Development from May03 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.


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.

The Diametric development from 2003 to 2008 has been considered as the 1st of the 5th. Due to the corrective structure in the

eg, larger 5th

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 chartombining 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

rdor 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 5th, and would therefore, restrict the upsides to much lo

evels than 50K, but end surely above 21000.

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

rdwi l l have to change to 5

th, because only a 5

thof the 5

th

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

rdshown , would then change to 3

rdand 4

threspectively, a

hown in Whi te.


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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.


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Weekly Technical Analysis 7TH JAN 2013

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