| Weekly Technical Analysis |
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| 21 July 2014 |
| - By
Vivek Patil, India's foremost expert in Elliot Wave
Analysis |
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Sensex bounces back for a
relief rally, retraces 61.8% of preceding fall.
-
June Retail Inflation at
7.31%, lowest since Jan'12.
-
WPI at 4-month low of
5.43%.
-
RBI signals cheaper housing
and infra loans.
-
Monsoon deficit starts
narrowing.
-
Russia comes under pressure
after Malaysian Airliner is shot down in Ukrain.
-
Short-term FMPs lose edge
after higher tax in the Budget.
-
Water in reservoirs recede
to worrying levels.
-
Rush for QIPs and IPOs see
Rs.16500 crs raised in two months.
-
SEBI imposes Rs.1850 cr fine
on Satyam's Raju and 4 others.
-
Brics nations censure Israel
for settlements in Palestinian territories.
-
India tops list of largest
share of global poor.
-
Govt proposes to tax advance
forfeited against sale of capital asset.
-
June exports rise 10.2%,
imports grow 8.33%.
|
Market generates Relief Rally as
expected, retraces 61.8% of fall
"slowly" |
[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, “we suspected post-event
profit-booking, and considered it to be a normal phenomenon.
Thequestion is whether, when and at what levels buying can
re-emerge … As on
Friday, Sensex has created 4 Bear candles in a row. It is usual for Index
fall to stall after 4-5 consecutive Bear candles. We may,
therefore, watch if
the current fall gets arrested by Monday/Tuesday of the fresh
week …
Levels-wise, Sensex is now just 100 pts short of its previous
support of 23rdJun at 24879, and Nifty is just 5 pts
short of its equivalent low of 7442. We may, accordingly, watch if the fall shows
arresting tendency closer to this 23rd Jun low … ”
Sensex
hit the bottom on Monday, and generated the suspected relief rally
during the rest of the week. Monday’s low of 24892
was just 13 pts short of 23rd Jun low at 24879 (Nifty, however, broke its
equivalent low by 20 pts). Adding 821 pts (Nifty
263 pts) from Monday to Friday, Index finally ended 2.5%
higher for the
week. While most sectors ended flat to +ve, the CG/Metal/Bank/Power
Indexes out-performed, each gaining 4-7%.
Sensex formed a sizable Bull candle for the
week, against bearish Dark Cloud Cover candle formed in the preceding
week, retracing it exactly by 61.8%. Market, thus, protected
itself from an immediate -ve follow-up to the bearish candle, and
indeed generated a relief rally we
expected.
Structurally, we expected an upward “g” leg,
starting from Monday/Tuesday time-wise, and from closer to
23rd Jun
low of 24879 price-wise, and market obliged.
Last
week’s rally was, however, “slower” as compared to the 4-day
fall in the
preceding week, because it took 4 days to
retrace 61.8% of the fall.
This raises a
question whether last week’s rally was a “g” leg or d-leg of the still-forming “f”
leg, which is possibly converting itself into an Extracting
Triangle.
Next week’s action could clarify this.
If the Index drops for 2-3 days, and then retraces that fall in
faster time, we could mark the drop as e-leg of suspected Extracting
Triangle inside “f”, and start “g” only thereafter.
By
the time the Extracting Triangle completes some time next week, “f”
leg would have consumed 10-12 days, which would compare well with
the time consumption of other legs of the Diametric that we assumed
from Feb’14 onwards.
An Extracting Triangle, as we
know, is a 5-legged
pattern with drops getting smaller (e < c < a), and
rallies bigger (d > b).
Thus,
post-Finance Budget fall (c-leg) was “smaller” than post-Rail
Budget fall (a-leg). Similarly, last week’s rally
(d-leg) was bigger than intra-day rally on the day of Finance
Budget (b-leg).
If this possibility
turns out to be true, it would be a bullish possibility eventually,
because an upward “g” leg is still pending.
Coming
back to our original structural assumptions made last week, we
expected a rally because Index usually turns
after 4-5 consecutive Bear candles. We, accordingly,
expected end of
the falling “f” leg, and assumed rally thereafter to be the last
upward “g” leg of
the Diametric.
We also said that such a rally
can be a short, 2-3 day affair, in which case, “g” can even end at a
“failure” point, i.e. below previous high. In case, however, any
such relief rally shows strength continuing beyond 2-3 days, it
could be a “normal” “g”, which could hit another fresh high for the
Index.
So far, we’ve seen the rally continuing for 4
days, more than 2-3 days, but the same is still “slower” compared to
the preceding fall, as pointed out.
Further, the current rally has
already formed 4 consecutive Bull candles in a row. By the same logic that
allowed us to predict end of “f”, next week we could see end of
“g”, i.e. after
4-5 Bull candles in a row.
However, to confirm its “g” and
it is ending, we require a downside “faster retracement” of the “g”
leg. Else, we could open the alternate scenario described above
that “f” is still forming as an Extracting
Triangle.
As said earlier, “g” has retraced 61.8%
of “f”. If it keeps strengthening even beyond it, than it could
retrace to 80-85% of “f”, which is exactly around the high of
the Budget Day at 25920 (Nifty 7731), and even attempt to reach a
life-time new highs.
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, which was
bigger than even the “x” wave joining the two Diametric patterns
inside F.
The fall in the Budget
week, till last Monday, measured 1298 pts, i.e. it is still not the
biggest fall. A
fall bigger than 1503 pts, which also retraces “g” in faster time,
would confirm completion of Diametric from
Feb’14.
Last week, after Monday, we saw
each and every dip attracting buyers on each day of the
week. On Friday,
however, the A/D ratio turned -ve after 3 days. This suggests
that buying on dips was getting limited and selective. To continue
upwards, we require follow-up support above Friday, confident with a
+ve A/D ratio.
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 the2nd Corrective 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.
Technical readings carried
forward from previous
weeks
On higher degree, we assumed larger F from Aug’13
to be a Complex Corrective consisting of two Diametric
patterns.
The1st Diametric formed during
Aug’13 to Jan’14, “x” completed in Feb’14,
and 2nd Diametric is forming
thereafter. As per NEoWave, channeled development is
generally indicative of Complex Corrective involving
x-wave.
The 2nd Diametric could complete
somewhere around 15th Jul’14, when it would
achieve time-equality with the
1stDiametric. Diametric is a 7-legged
pattern, marked as a-b-c-d-e.
The recent
high was the level where the 2nd corrective from Feb’14
achieved equality with the 1st corrective from Aug’13 to
Jan’14 “externally”.
Note that 1st corrective measured 3961
pts on Sensex from
17449 (Aug’13 low) to 21410 (Jan’14 high). This magnitude projected
“externally” from Jan’14 high calculates as 21410+3961=25371,
exactly the high of the day of Election
Results.
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.
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.
Like Sensex, the broader Indexes
also have not retraced any of their rally in faster time so far, and
have maintained higher bottoms since Aug’13. Long-term Investors
may keep a close watch for maturity signs on broader Indexes as
well.
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. | |
