| Weekly Technical Analysis |  |
| | 25 Aug 2014 | | - By
Vivek Patil, India's foremost expert in Elliot Wave Analysis | |
-
Sensex adds 1.2% to hit
another record high.
-
Govt calls off Secretary
level talks with Pakistan.
-
RBI proposes to cut banks'
group exposure by 15% to 25%.
-
S&P hits a new record
high.
-
Maharashtra, Haryana,
Jharkhand CMs not to share dais with PM.
-
RBI asks PACL to refund
money to investors and wind up operations.
-
Maharashtra Governor quits
after being transferred to Mizoram.
| Pattern Implication for triangular "f"
takes Sensex to a new high as
expected | [Technical readings carried forward from previous weeks
are shown in italics. Readers can easily identify the new arguments which
are written in regular font]
Last week we discussed, “The fall did not retrace the
preceding 9-day rally completely in faster time,
the parameter we required to end the upward structure … Indeed,
since Feb’14, none of the rising segment was ever retraced
completely in faster time. Until that actually happens, the structure continues
as +ve, with higher top higher bottom as per the basic Dow Theory
… ‘f’ is better
explained as a 5-legged Triangle … last week’s action
confirmed as what we suspected as an upward ‘g’ leg of the Diametric
… The Triangle inside ‘f’ appears ‘Limiting’ … the Pattern Implication (PI)
for Limiting Triangle is 100% of its largest leg, +/- 25%, usually
to be achieved on or before reaching the Apex Point, i.e. by
coming Tuesday-Wednesday … As per PI,we cannot rule out Sensex
hitting a new high level by coming Wednesday … ”
Sensex
achieved the “minimum” Pattern Implication of 75% (100% less 25%),
and hit a new high on the very first day of the
week. Turning sideways after achieving our minimum
expectations based on the PI, Index entered into a
sideways trend for the rest of the week, but still managed to
clock a net gain of 317 pts or 1.2%.
While FMCG Index lost 1.3%, all other sectors
finished flat to +ve for the week. The CD/Pharma/Bank/Auto Indexes
led, with gains of 4-6%
each.
The broader market
outperformed as well. While the BSE Small-Cap Index gained 4.8%,
the BSE Mid-Cap Index added 3.8%.Both the Indexes recovered
exactly from the Neckline we showed, and argued for turning it into
a support line last week.
Besides Sensex, the broader Indexes also have
maintained higher bottoms since Feb’14, and none of the rallying
segment on their charts is retraced so far. The overall structure,
accordingly, still looks +ve, even across the broader segments of
the market.
Last
week, we showed NEoWave patterns from Feb’14 onwards and discussed
Pattern Implication based on the “Limiting Triangle” inside
“f”.
We argued “g” could achieve 100%, +/- 25%,
ratio with the largest leg of the Triangle we assumed inside
“f”. At its highest point last
week, i.e. at 26531, “g” leg achieved 92% ratio.
Note
that the largest leg of “f” was its b-leg. The PI was
minimum 75% and maximum 125% ratio to this leg, and last week’s high of
26531 achieved 92% ratio, i.e. “g” has met the “minimum”
PI.
The 100% and 125%
ratios would calculate to about 26630 and 26980 approximately. But
these ratios, are “possible”, not “mandatory”. What was mandatory
was the 75% ratio, which has been achieved already,
Time-wise, the minimum Pattern
Implication was to be achieved before reaching the “Apex Point” of
the Triangle, i.e. before Wednesday, and Sensex achieved it on
Monday itself, thus satisfying the time limit as
well.
The question is
whether and how the Index would start developing maturity signs
after achieving the minimum PI, OR it would move further up to
attempt the maximum PI.
From Wednesday onwards, Sensex broke the rising
channel that can
be drawn enclosing the 6-day rally of “g”. Sensex entered a sideways trend
after breaking the channel.
Technically, there are three basic
trends : Up - Down - Sideways. Sideways trend is usually choppy.
Structurally, the sideways trend of last four days looks like b-leg inside “g”. Next week’s action could
either continue forming the b-leg or open c-leg of “g”
upwards.
Unless “g” ultimately forms as an Extracting
Triangle or Diametric, its b-leg should consume more time
compared to it’sa-leg.
Since Sensex’ history from
Feb’14 onwards showed maximum 4 Bull candles in a row on its Daily
chart, we did not
rule out formation of a Bear candle on Monday or Tuesday of last
week.
Accordingly, Index did form a Bear
candle on Tuesday, and moved sideways
thereafter.
For the forthcoming Expiry week, movement could remain
volatile and choppy until the 4-day range breaks decisively on either side. We may
tread carefully until then.
Ever since
16th May,
the day of Election Results, each and every rally got restricted to
7-8 days time-wise, and about 1200-1600 Sensex points
price-wise.
As of last week’s high, the upward “g” has
already lasted for 7-8 days and also achieved 1298 Sensex
Points.
As shown on the chart below, this development, so
far, looks similar to ‘2008. However, the comparison would only
prove academic until we see faster retracement of a rallying
segment.
Indeed, since Feb’14, none of
the rising segment was ever retraced completely in faster time.
Until that actually happens, the structure continues as +ve, with
higher top higher bottom as per the basic Dow Theory.
As
we mentioned last week, the most recent fall was contained to 1067
Sensex points, which was comparable to all the previous falls we saw
since Aug’13 onwards, as was shown on the chart
below.
By NEoWave, as we pointed
out, we required
complete and faster retracement of the last rising segment to
confirm an end of the upward structure.
Structurally, we assumed the larger F
from Aug’13 onwards to be a Double Diametric. The development from Feb’14
was, accordingly, assumed as its 2nd Corrective Diametric,
as was shown on chart below.
97% of
the gains made in the 2nd Corrective so far were
registered in the first 3 months from 14th Feb to 16th May (the Day of Election
Results). Thereafter, gains have been limited to 2-4%
over and above the highs of 16th May.
The Double Diametric
structure maintains a channel, as any Complex Corrective
structure involving “x” wave would do as per NEoWave
analysis.
If the Index matures near the upper
end of this channel, it could slide down to test its lower
end.
Short-term structure turns -ve if Daily Close only
chart makes lower top lower bottom below the latest 7-day rising
channel.
Few weeks ago, we listed FII
selling locally and Dow breaking its base line globally, as two risk
factors for long term investors. Initial indications were seen
slowly coming in both these
two.
The FII net Investment,
however, revived a bit recently, and even made a fresh high
during the week.
Dow also recovered a bit
last week from the Blue support line
joining its previous two lows of Oct’13 and Feb’14. On its Daily
chart, Dow appears attempting to hold its crucial 200-day EMA. As we
pointed out during previous weeks, it had broken its monthly
Base-line marginally.
Structurally, on a higher degree, we
considered the upward structure from Aug’13 onwards as the F leg of
a larger 7-legged Diametric since the year ‘2008, as was shown
on the Monthly chart
below.
Time-wise, each of the leg of this
large diametric continued for 8, 13 or 21 months, which are
Fibonacci Numbers. While its B leg consumed 21 months, D leg
consumed 8 months. All the other legs consumed 13
months.
The current upward leg from
Aug’13, which we marked as F, completes 13 months in Aug’14, i.e.
the current month.
This time
Analysis suggests F can mature during the current month. From
that perspective, we even listed the Global and Domestic risk
factors to be cautious
about.
However, if the Index refuses to
mature this month, and shows strength even beyond Aug’14, we had
laid out an alternate scenario, which shows that the larger
corrective phase from ‘2008 onwards completed as 5-legged Ascending
Triangle, and post Aug’13 structure is actually a breakout from the
Triangle, as was shown on the chart below
:
It, therefore, appears that we are at crucial
juncture price-wise and time-wise from the perspective of a long
term Investor, who should keep a tab on the structural
alternatives discussed above.
In the coming Expiry
week, we may watch if Index continues its sideways trend for b-leg of “g” or opens c-leg of “g”
upwards.
If the sideways trend turns into Down
Trend, we can see a deeper b-leg, even testing
the Apex Point of Triangle inside “f”, as marked on the
charts.
If, however, c-leg opens upwards, we may watch if the overall
magnitude of the “g” leg is restricted to maximum Pattern
Implication (PI) or 1600 Sensex points as discussed in detail
above.
Technical readings carried forward from
previous weeks
All in all, we are now closely watching if the
action is getting matured near the upper end of the channel
enclosing the up-move since Aug’13 (F leg of higher degree), as was
shown on the following chart.
The channeled F from
Aug’13 consists of two Diametric corrective patterns joined by
“x”. It was
also pointed out that the 2ndCorrective
achieved “external” equality with the
1st Corrective at
25376.
Once the 2nd Corrective Diametric is
confirmed over, by way of 1503+ pts fall retracing “g” in faster
time, the Sensex may test lower end of the
channel. Protecting lower channel and 61.8%
retracement level of the 2nd Corrective would force us
to mark the fall as 2nd “x” inside the larger
F.
However, if the Sensex eventually
weakens below the lower channel and 61.8% retracement
level of the 2nd Corrective, it would
indicate that F completed as Double Diametric, and the larger
downward G has
opened.
Structurally, since Feb’14, Index is
yet to retrace any of its rallying segment completely in a “faster”
time.
Since Aug’13, when F began, the
biggest fall was seen on the day of Election Results, about 1503
pts. A fall bigger than 1503 pts, which also retraces “g” in faster
time, would confirm completion of Diametric in the
2nd corrective from
Feb’14.
The
disparity between Sensex and broader market was shown on the
comparative chart below.
The broader market
outperformed Sensex from Nov’13 onwards, and its out-performance was
especially significant from 16th May onwards, the day of
Election Results, as can be seen on the
chart.
The chart now shows the “Necklines”
of probable Head and Shoulders formations on the Small-Cap and
Mid-Cap Indexes. A decisive break below these necklines could define
a major top.
Since the Right Shoulder is bigger
time-wise, it does not look like a perfect H&S formation. We
may, therefore, watch if the suspected Necklines convert into
Support line, at least temporarily.
If the last legs of the Diametric keep
violating the b-d line, Sensex could enter into an extremely
volatile but ranged phase till the middle of next Month, and the
same could form into a topping action similar to the tops of ‘2008
and ‘2010, as shown on the charts below :
Long-term
investors can hold on till it is confirmed that the “g” leg, and
therefore the 2nd corrective as well as
larger F is over for
good.
In the meanwhile, investors may
keep a tab on the risk factors. Major event like Election
Results, Budget, are now behind us. Hope rally has played out. FIIs selling off is a
risk factor, though, So far, this
has not yet played out on any meaningful
scale.
Another set of risk factor would be
Global, like Dow breaking its base-line on its monthly chart,
etc.
We’ll watch if market
movement develops into a topping formation by ‘Jul, similar to ‘2008
and ‘2010, especially if rallies continue to attract selling at
higher levels.
Among different tools
of technical analysis, VP’s Grid System,
published only in this Weekly Report, has been providing prefect
levels to watch out for, over the last few
years.
Profit-booking on rallies
was seen coming in from around the Grid level of 25150, which we
also mentioned as our upper target for the “g”
leg of the Diametric inside
2nd corrective.
On one higher degree, we considered
post-Aug’13 development to be F leg of a larger Diametric formation
from ‘2008onwards as shown on the chart
below.
At the recent high, the F leg achieved 100%
price-equality “externally” with D leg. D was from Dec’11 to
Jan’13. With F
achieving price-time ratios with D, the question if whether
F is now maturing, and larger G would go down from
here.
This long-term scenario marking the
larger Diametric was published on 6th Feb’12. This Diametric
assumption, as was argued,compared well with the 11-year
Diametric formation previously seen during ‘1992 to
‘2003.
As shown on the chart
above, F is the
“Expanding” leg of the 7-legged Diametric from ‘2008. In the
previous instance of the Diametric during ‘1992-’2003 period, F leg had hit new highs
during ‘2000.
In other words, F leg of the
diametric making new highs is nothing new. After hitting new highs
during ‘2000, G leg went down till
‘2003.
We argued for a Diametric
development from ‘2008 onwards because we observed time-similarity
within its legs, which is symptomatic of such a pattern. So far, most of the
legs, except B, have consumed exactly about 13
months.
On the monthly Close-only chart
given below, one can see Sensex crossing previous highs, indeed
taking their support for reaching further newer highs for the F
leg :
We may watch if Sensex shows maturity
signs at current levels and starts cracking. Formation of lower top
lower bottom, followed by crash below the 0-x line for
Double-Diametric formation inside F would provide the -ve signs in
this regard. Investors may wait till this actually
happens.
If we do not see formation of
top at current levels, and indeed see the Index strengthening
further above recent highs, then we may have to choose the alternate
scenario shown
below.
We considered this alternate
scenario when Sensex moved above 2008-10 highs. It shows corrective phase
from ‘2008 completing as a 5-legged Ascending Triangle. This
scenario can open much higher targets, 30000+ for
Sensex.
The 30000+
target is nothing but 100% (+/- 25%) breakout implication of the
largest leg of the
Triangle.
According to
NEoWave, corrective phase should consume more time than the move it
is correcting. After the 56-month rally from May‘2003 to
Jan’2008, Sensex has corrected for 67 month from Jan’2008 to Aug-13,
i.e. a larger period as required under
NEoWave.
We may consider the above
scenario if the up-move from Aug’13 onwards stretches above
25500-26000 price-wise, and beyond Aug-Sep’14
time-wise.
The
following picture should throw some light on the post-election movement
on the Sensex since ‘1980 onwards :
Since ‘1980, major up-moves were seen
mainly after formation of a Congress-led
government.
Now that a BJP-led
Government is taking over, and has a clear mandate for development
and governance, we’ll watch if a new era is
taking over, wherein previous historical political parameters will
get
challenged.
As we have been
emphasizing, investors may remain +ve
on the market until clear -ve signs and confirmations, discussed
earlier, are clearly visible.
By NEoWave logics, complete and faster
retracement of the last upward leg, would confirm that the Diametric
structure inside the 2nd corrective is
over. Look how
faster retracement of the 6th rally on the chart above
signaled completion of the 1st corrective.
We,
however, cannot rule out that a sufficient
time-correction is required after any multi-fold rally. As shown
below, such time
correction can last for as much as 161.8% to 261.8% time ratio to
the multi-fold rally.
As for the last multi-fold rally during
‘1988 to ‘1992, its correction lasted for 262.8% time ratio, from
‘1992 to ‘2003.
We argued in favor of long
term consolidation phase beginning ‘2008 because prior to ‘2008,
Sensex had multiplied 7 times from its ‘2003 lows. We argued,
such multi-fold
rally could results into a multi-year consolidation phase. Inside
such a phase, even moves reaching new highs are considered its
internal part, and not as
breakouts.
As we noted, after 11-fold
rally during ‘1988 to ‘1992, Sensex consolidated for 11 years till
‘2003 (261.8% time ratio). Within this consolidation, Sensex
corrected as much as 30-60% every time it came closer to previous
highs or even after hitting new
highs.
An ideal
“suckers rally” usually involves making a New
High. As we can be seen on the
chart below, Sensex
moved higher than its ‘1992 highs during ‘1994 and ‘1997, but
reacted by over 30% both the times.
Later during ‘2000, it broke
1992/1994/1997 highs, by as much as 1500-1600, only to lose 58%
later. After a severe corrective phase lasting from ‘2000 to
‘2003, Index broke
‘2000 high during ‘2004 by 100 pts, but even then shaved off 30%
before the next rally could take place.
All this happened because the
11-year long ‘1992-2003 phase was a multi-year corrective phase
correcting the preceding 11-fold rally from ‘1988 to
‘1992.
On the super-cycle degree, we are considering a
“Terminal” development since ‘2003 onwards. The Terminal was suspected
because its 1st wave from 2003-2008 was a
label-3 “corrective” pattern. (As against a normal label-5
Impulse pattern).
The 2003-2008 rally was
internally marked as a corrective pattern called a Running
Diametric.
Also,
more importantly, it is only inside a Terminal that
2nd wave
can be Triangle. (as against this, in a normal Impulse,
2ndwave cannot develop as a Triangle, only
4th can).
Under the circumstances, if our assumed F leg
continues beyond 13 months, i.e. beyond Jul-Aug of this year, then
we could be forced to consider the current up-move as the
3rd of the
Terminal Impulse, as per the Green labels shown
above.
The basic NEoWave requirement is that such
a corrective phase
should consume more time than the move it is correcting.The
‘1992-2003 corrective phase, remember, continued for a time-ratio of
261.8% to the preceding 4-year rally from ‘1988 to
‘1992.
As per Wave Theory, a corrective phase
shapes up as 3-legged Flat/Zigzag, 5-legged Triangle or 7-legged
Diametric (which
basically combines 2 Triangles).
The
question, therefore, is whether the corrective phase ended as a
5-legged Triangle in Aug’13, OR it would continue for 2 more legs
and form as 7-legged
Diametric.
As was shown on the chart
below, all the
up-down legs from Jan’13 to Aug’13, except “b”, consumed exactly
20-25 days, and formed into a 7-legged
Diametric (Diamond-Shaped
variety).
As per VP’s observational
rules, all the legs, except “b”, of a 7-legged Diametric tend
towards time-similarity. Indeed, by reverse logic, when
legs begin to be similar in time, the structure is more likely to
form as a Diametric.
Similar to the
pattern explained above, on one higher degree, we also observed
time-similarity from ‘2008. All the legs, except “b”, consumed about
13 months since the year ‘2008.
The question, now, remains if we continue with the
Diametric assumption or complete the post-‘2008 development as a
5-legged Triangle. As we have been explaining, we can open possibility
of ending the phase as Triangle only if we see strength continuing
beyond Jul-Aug of this year.
The
market is being moved mainly on a/c of FII buying heavyweights
selectively, even as many stocks have been trading near
previous lows in the broader
market.
During
8 quarters from Oct’08 to Nov’10, FIIs invested over Rs. 215000 crs
as per SEBI data. In the current 8-quarter up-move post Dec’11, FIIs
invested over Rs.242000 crs. Thus, post Dec’11 up-move has
so far remained smaller despite the larger investment from
FIIs.
As for DIIs, SEBI data shows
divestment of Rs. 32400 crs during Oct’08-Nov’10, and of Rs. 43800
crs after Dec’11. Thus, the up-move of last 8
quarters remained smaller despite the higher FII investment, and
larger divestment from
DIIs.
Despite huge
FII buying in the last five years since ‘2008, the Sensex was still
closer to ‘2008 high so far, despite Net Investment
of Rs. 369901 crs till Jun’13 by the
FIIs.
How reliable is the FII Net
Investment data coming from SEBI is another question. We generally
see the inflated figure in FII buying matching with DII’s selling
figure. However, above observation is made assuming the data from
SEBI is correct.
Not
related to Wave Labels so much on an immediate basis, VP’s 30% Principle shows
that Sensex is at a risk of 25-30% cut every 2-3 years, ever since
‘2004, i.e. in the last 9-10
years.
In this period, the 25-30% cut
was seen from the tops in May’2004, May’2006, Jan’2008 and Nov’10 so
far. The last bottom was during Dec’11. Sensex has now completed
27 months since then without a 25-30%
cut.
We should keep the 30% principle
in the back of the mind, and act as required when the time
comes.
Appendix :
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).
The
wave-count presented shows that the market is into the lower-degree
5th of the SC-degree 3rd or 5th wave.
The
detailed wave-count from ‘1984 onwards can be seen on the Monthly
chart given below. The 2-4 line shown on the ASA long-term Chart
above, and Monthly chart below, would determine if the post ‘1984
Impulse is a Super-cycle-degree 3rd or
5th.
Super-Cycle-Degree
3rd (or
5th) began since Nov’84. Its internal 3rd was an “extended”
leg, which achieved exactly 261.8% ratio to the 1st on log scale. The Sensex is
now forming the 5th Wave, and the same could
develop as a ”Terminal”, because its lower-degree
1st wave
from May’03 onwards developed as a Diametric (which is 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.
While
the 4th is
shown as a 3-legged a-b-c Flat on the monthly chart above.
Alternatively, the 4th 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.
 .
As mentioned above, the
lower-degree 1st from May’2003 to Jan’2008
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” 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 is considered to be the
1st wave of the Impuse. Due to the corrective structure in the
1st leg,
the higher-degree 5th could be developing as a
Terminal. Since ‘2008, we are into its 2nd wave, which could
continue to develop over a period of 7-8 years beginning
‘2008.
As per NEoWave, break of 2-4
line confirms a Terminal development, and If the 5th proves to be a Terminal,
the Super-Cycle-degree label of 3rd will have to change to
5th, because only a 5th of a 3rd cannot be a Terminal. Only
a 5th of
the 5th can
be a Terminal. The Super-Cycle-Degree marking for
1st and
2nd as
shown on ASA long-term chart, would then change to
3rd and
4threspectively.
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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. |
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