Weekly Technical Analysis July 02,2012 - By Vivek Patil, India's foremost expert in Elliot Wave Analysis Top Stories

of the Week

Sensex breaks 200-day EMA after 2-3 weeks reluctance. Rupee posts biggest rally in 3 years on the last day of the week. Prime Minister Manmohan Singh takes over Finance Ministry, calls for animal spirit. Govt raises ceiling for foreign investors in bonds to step the fall in Rupee. Monsoon progress reported to be below normal so far. Moody's maintains India's credit rating at Stable. India Inc. capex growth at 8-year lows during 2011-12. Job market pushed to an 18-month low. S&P says US faces 20% risk of double-dip recession. CRISIL project 14% drop in revenue growth this quarter. Fitch Ratings says Indian economy has entered into stagflation. Oil firms reduce petrol prices by Rs.2.46. India's current a/c gap at 20-year high.

Sensex finally surges above 200-day EMA on the last day of the week, watch 17500-700 Last week we discussed, The activity during the last two weeks can be roughly enclosed in an upward -slanting parallel channel, which is testing the crucial 200day EMA on the upside Trading-wise, we may take a ranged approach for the time being, perhaps until the Index is able to decisively break beyond the channel corrective phases can develop sideways, in an upward-slanting way, and even turn out to be Irregular in nature Skilled players would wait for the next trending phase, or concentrate on stock charts which may be trending in the meanwhile Once 2nd gets over, 3rd would move further higher Sensex traded volatile during the first four days of the week. Initially 158 pts higher on Monday morning, it came down 316 pts by Tuesday. However, holding Tuesdays low on the next two days, it generated a breakout from the 3-week long range on the last day. While Sensex finally finished 457 pts or 2.7% higher, Power and Metal Indices gained 4-5%. Dollar-based Indices surged over 5%, mostly on the last day, as Rupee shot up on statements by PM an RBI.

The action formed a sizable Bull candle on the Weekly chart, and a Piercing Line Bull candle for the completed month of Jun12 on the Monthly chart. Fridays showed a high-volume, 100-pt gap-up action, appears as a breakout from the 2-3 week long sideways / indecisive range of the market, which also broke above the 200-day EMA. Indeed, Fridays volume topped its highest levels after Feb12, which makes it a credible breakout technically. After such a surge, it would seem normal if we see some profit-booking. However, the bias would remain +ve as long as the dips, if any, maintain Fridays gap-up area of 17034-135. Structurally, we considered the sideways action as 2nd wave inside c of D. Fridays strong action appears to be beginning of the 3rd wave, as marked on the charts. As corrective wave 2nd has to consume more time compared to the 1st, labels have been rearranged to begin the 2nd from 11th Jun, thus modifying the construction of 2nd wave to a 7-legged Diamond-shaped Diametric. As per the modified labels, the 1st is shown to be a 5-day affair from 4th Jun to 11th Jun, and 2nd consumed 13 days from 11th Jun to 28th Jun. Thus, time of 1st and 2nd are both in Fibonacci Numbers, and maintain 261.8% ratio. On an immediate basis, we may watch 17500-700 (Nifty 5310-80) as crucial, which is the area near the Island Reversal of 4th Apr12 and the x point marked on 3rd Apr. Though we considered the current rally from 4th Jun low of 15749 (Nifty 4770) as an Impulsive c of D, we were set for a 2-stage confirmation of the structure. In the 1st stage, we required faster retracement above the channel enclosing b of D. By moving above the channel, the 1 st stage of confirmation was generated in the 2nd week of rally. The 2nd stage required faster move above the x points at 17664 (Nifty 5379). This, however, is still awaited. But we are very close to it, and well watch for it in the coming week.

The 2nd wave inside the Impulsive c of D corrected less than 38.2% of the 1st price-wise, and 261.8% time-wise. The 3rd can achieve greater lengths than the 1st. It can achieve 100% to 161.8% of the 1st. This would project 18000-100 to 18700-800 on Sensex and 5450-5500 to 5650-5700 on Nifty. Since the 2nd wave looks like a Running corrective, the end of which was above its starting point, 161.8% ratio or even more is possible, which would create a 3rd Extension Impulse in the c of D. All this, provided we see the described 2nd stage confirmation above x point in the coming week or two. Structurally, while the Impulsive structure of the 1st of c is visible on the Daily chart, the Intra-day chart shows some deficiencies w.r.t. alternation between lower-degree 2nd and 4th inside the 1st, and also w.r.t. faster retracement of the lower-degree 5th inside the 1st. Due to this, we better watch for the 17500-700 in the coming week for the reasons described. However, as long as any correction does not close below previous day and remains limited to 1-2 days, the impulsive assumption should be assumed as correct. On one higher degree, we assumed larger D leg began from Dec11 (wave-count-wise from the 9th Jan12), and the same may be developing as a Flat. Its a leg was a channeled Double Zigzag till Feb12, and b was a channeled Complex Corrective enclosing 2 Diametric formations. Also, b corrected a by 80% price-wise, and by 161.8% time-wise. From 4th Jun low of 15749 (Nifty 4770), Sensex is assumed to be forming c of t he 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 upwards. We i nitially targeted it to achieve 16750-17000 levels. This area is now achieved and broke above. Though c of a Flat could achieve Fibonacci proportion with a leg, anything from 38.2% to 261.8%, price-wise and time-wise, normal expectation would be a 100% ratio. The 1st stage of confirmation that we are indeed into impulsive c of D would require upside break of the 15 -week channel drawn around b. By crossing the channel, the 1st stage of confirmation is in place. The 2nd stage confirmation would require complete retracement of the 2nd corrective inside b, i.e. a move above x, and that too, in faster time. This is still awaited. Referring to the larger-degree structure, we are assuming the 14-month fall from Jan08 to Mar09 as A of a large 7-legged Diametric. The 20-month rally from Mar09 to Nov10 is assumed as its B leg. The 14-month fall from Nov10 to Dec11 was labeled the C leg of the larger Diametric, which was a well-channeled Complex Corrective involving two equalsized correctives. From Dec11, we are into the D leg, which is still on, developing as a Flat. The rally from Dec11 to Feb12 was labeled as a of D, and the same was a well-channeled Double Zigzag, which carried a pattern implication of about 80%. While the orthodox Wave Theory gives importance to 61.8% retracement level and calls it a Golden Ratio, NEoWave Theory considers 80% also as another important retracement level, especially after channeled moves. As the chart below depicts, since Nov10 it has been generally useful to consider 61.8% to 80% retracement area as crucial for terminating corrective phases. It worked this time as well.

On one higher degree, these a and b legs are part of the D leg which commenced from 9 th Jan, and is developing as a Flat, wherein by the definition of a Flat, a is non-impulsive, and b corrects more than 61.8% of a. Once b is over, c should move higher as an Impulse move, and can break the top of a at 18524. We had earlier suspected that the higher degree C leg from Nov10 downwards ended on 9th Jan12 as a Double combination. This leg was also wellchanneled, and enclosed a Neutral Triangle (from Nov10 to Jun11) and Contracting Triangle (from Jul11 to Jan12). As we also observed, the 1st and 2nd corrective were exactly equal price-wise, both measured almost exactly 3800 Sensex points. 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. After breaking the 14-month long channel (from Nov10), we suspected that current rally has potential to be marked as D leg of a much larger Triangle or Diametric from 2008. This option was preferable because C leg from Nov10 was not an Impulse. Non-impulsive C leg could only be part of a larger Triangle or Diametric. Inside this, the larger A leg was from Jan2008 to Mar2009. The B leg was from Mar2009 to Nov2010. The C leg came down from Nov2010 to Dec2011, as a channeled fall (Complex Corrective) with two equal standard correctives. While A and B were equal-sized price-wise, C achieved time-equality (14 months) with A. The long-term Diametric picture was shown on the chart below.

By NEoWave logics, D leg of a Triangle can retrace minimum 50%, or ideally 61.8%, of the C leg. The 50% level was at 18123. So far, D leg has retraced C by about 57%. 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 from 2008 being Triangle or Diametric is true, D could remain smaller than C, i.e. not cross Nov10 high of 21109. See the D leg marked during 1996-97 on the chart. One may also note that the D leg during 1996-97 corrected 98% of C, and internally developed as a Flat, wherein b had retraced a completely. We can see both the D legs as marked in Purple squares for the comparison. The current meandering phase of the market may be because market is forming D leg, which is the middle, Contracting portion of the larger Diametric formation. Yearly lows Sensex has broken 2010 low of 15652, and now in 2012 is found holding the 2011 low of 15136. As the past instances would show, once the yearly low gets broken, a minimum of 20% cut from the low has been a usual phenomenon, though gradually. A 20% magnitude reduced from 15652 would calculate to about 12500 for Sensex. This level matches with the huge gap-up action (refer to Weekly chart discussing 32-week cycle) seen during the 2009.

The chart given below shows equidistant parallel lines enclosing the development since Nov10. Further, it shows how Sensex respe cted most of its important lows as resistances later. Sensex has now recovered nearly 11% exactly from this level, and is now testing 17300/17500 levels marked on the chart.

32-Week time cycle The development since Mar09 has followed a 32-week time cycle, as shown on the chart below. This had raised a possibility that an important low was may be formed around 20th Aug. Sensex responded by hitting the bottom on 26th Aug. This also raised the possibility of an upward/sideways phase that could survive for 32 weeks from Aug11, and end either on 4th Feb12 or 31st 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 remain smaller as suspected. As we already know, Extracting Triangle is a pattern which shows smaller rallies and bigger drops. Thus in one direction, it shows e < c < a, and in the opposite direction, it shows d > b. On one higher degree, Extracting Triangle (from Mar09) would make up the larger 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 as 261.8% time compared to A, before C leg of the equivalent degree goes down. This is an extremely bearish picture, alternative to the larger Diametric scenario discussed earlier, wherein C can f all to test even Oct2008 lows. Above 18000, Right Shoulder become bigger that the Left Shoulder, which may appear rejecting the Head & shoulders or Extracting Triangle argument. However, the 32-week time cycle also matches with the 2-year cycle (already discussed), and may therefore be watched. The Sensex was seen testing the Neckline shown on the chart, which did prove crucial, as Sensex bounced 9% from the Necklin e.

All major tops are characterized by 30% drop from the top value. This is normal not only inside a bear phase, but is commonly seen even inside a bull phase too. The 30% taken out from the current top value on Sensex (21109) would be less than 14800. The total loss so far, from the high of 21109 to 15425, measures around 28% so far. However, on BSE Small-Cap and MidCap Index, the loss from 2010 high does measure more than 30%. Overall, it was argued much earlier, that we would see a topping formation spread over 2-3 month period 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 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 period just before the high of 21206 was hit on Sensex. This was also an extremely volatile period of nearly two months, just before the market actually topped out. The following chart of 2008 period shows two equidistant parallel channels. The Sensex broke above the original channel and achieved an equidistant height at the upper parallel, 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 number of sell-offs beginning Oct07, before it finally topped on 8th Jan08.

A similarity can be drawn for the 2010 top formation with the developments of 2008, as shown below. Sensex was seen testing the lower Blue parallel, from where it bounced recently.

2450-point Grid chart for the Sensex Sensex has been following 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. See how heavy damages occurred almost exactly from the Grid level at 17800. The next Grid level around 15300 is proving support lately.

Our markets, remember, has seen multifold 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 4 years in Indian context. Remember, Sensex rallied 11-fold from 390 (Mar88) to 4546 (Apr92) in four years, after which it consolidated 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 as a Triple Combination). The longer time required while 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 2nd wave of what appears as a probable Terminal beginning 2003. Even though we saw the market reaching levels above Jan08 highs, the multi-year consolidation is expected to shape up like a large decade-long Diametric, looking similar to the consolidation we saw from 1992 to 2003. Our trading/investment strategies should be designed accordingly. The suspected corrective phase beginning Jan08 would be the 2nd wave within the larger 5th wave. This 5th wave is suspected to be forming as a Terminal due to absence of impulsive behavior in its internal 1st 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 development usually violates the 2-4 line. 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, '1984 was the beginning of 8-year long bull-run till '1992. In our Super-Cycle Degree count, shown on ASA Long-Term chart under a separate paragraph, weve considered 1984 as the beginning point for the most dynamic 3rd wave. The next two important turning points occurred exactly 8 years thereafter, 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. 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 the year '2003. During 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 cut was almost 58% from 6150 in 2000 to 2594 in 2001. We had, accordingly, targeted sub-10k levels for Sensex price-wise during 2008-09, and a minimum of 13 months into bear phase, time-wise. The price-time targets were achieved as Sensex dropped 63% from 21206 to 7697. 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 this long-term channel also weighed in favor of a larger corrective phase following this 8-year cycle.

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, beginning Sep'1994 got over in Oct'2005 at 7656. The last corrective within this Complex Corrective phase formed as a "Non-Limiting" Running Triangle. This has been my preferred scenario for many years, which I had assumed to be under development since I began long-term forecasting during 1997-1999. This one was the basis of Forecast for the 21st Century article published in Business Standard (which can be read on vivekpatil.com). This scenario also combines well with the traditional channeling technique. Sensex followed a parallel channel for 11 long 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. This scenario is shown on the chart given below :

As per my second alternative, a Super-Cycle-Degree 3rd (or 5th) began since Nov84. Its internal 3rd was an extended leg, which achieved exactly 261.8% ratio to the 1st on log scale. The Sensex is now forming its 5th Wave, and the same is likely to develop as a Terminal, because its lower -degree 1st wave since May03 developed as a Diametric (a corrective 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, 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. 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 combines two Triangular patterns, one initially Contracting up to 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 has been considered as the 1st of the 5 th. Due to the corrective structure in the 1st leg, larger 5th could be developing as a Terminal. Since 2008, we are into its 2nd wave, which could continue to develop over 8 years from 2008. The "Double Extension" scenario was also shown on following ASA Long-term Index (chart below). I've created this chart combining Index compiled by a British advisor (from '1938 to '1945), RBI Index ('1945 to '1969), F.E Index ('1969 to '1980) 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 3rd or 5th wave. 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, and would therefore, restrict the upsides to much lower levels than 50K, but end surely above 21000. If the 5th proves to be a Terminal, one larger-degree label of 3rd will have to change to 5th, because only a 5th of the 5th can be a Terminal. The SuperCycle-Degree marking for 1st and 3rd shown, would then change to 3rd and 4th respectively, as shown in White.

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