[August 04, 2014] Vivek Patil - Weekly Technical Analysis

[Mayur Patel]

 

 
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Mayur K Patel
Branch Manager,
Sharekhan Ltd,
Ghatkopar Branch, Mumbai.

  
 

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Weekly Technical Analysis 04 Aug 2014 - By Vivek Patil, India's foremost expert in Elliot Wave Analysis   Top Stories of the Week Sensex break below 26K, loses 2.5% for the week. RBI Credit Policy to come out coming Tuesday. US-Europe markets tumble over ongoing tensions with Russia. Rupee weakens to a 4-month low. Core sector output grows at fastest pave in 9 months. Combined NP of 290 firms grows at slowest pace in 9 quarters. Sangh outfits for banning trials of GM crops. Syndicate Bank Chief held on allegations of bribery. Sensex breaks below 26K - Watch if rally gets retraced in faster time [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 rally proved first ‘slower’ retracement of a falling leg since Feb’14, which, technically, can prove as a sign of weakness … rally could be considered either as ‘g’, as already assumed, OR b-leg of a still-forming ‘f’ … After maintaining the channel for 8 days, Friday’s action broke the rising channel marginally. 8 is a Fibonacci Number … weakness below 26K would not only turn the bias -ve, but also mean a decisive break of the rising channel, and establish at least a short-term top at last week’s high … whether the rally gets completely retraced in faster time or not would be the next thing to watch … faster drop below 14th Jul low would mean this rally completed as ‘g’, and not as b-leg inside ‘f’ … ” Sensex broke below 26K-mark on Monday itself. Moving around the mark on Wednesday & Thursday (Tuesday was Id holiday), it collapsed again on Friday, and finished 646 pts 2.5% lower for the week. While the Capital Goods Index tanked nearly 8% during the week, the Oil&Gas/Metal/Power/Realty/PSUS Indexes shaved off 2.5-3% each. Only Healthcare Index managed to end flat.  After 2 consecutive Weekly Bull candles, Sensex formed an Engulfing Line Bear candle for the week. Such a candle carries -ve implications if it generates follow-up selling and close below its bottom. Remember, Index had earlier rejected the -ve implications of the bearish Dark Cloud Cover candle formed in the Budget week. Can it do that again ? Repetition of such bearish candles on the Weekly chart could, otherwise, indicate a topping formation. Friday was the 1st day of ‘Aug Expiry, and the day’s action indicated a bad start to the new a/c. The action on Thursday and Friday together indicated market’s inability to support even Blue Chip heavyweights, and FII net inflows turning -ve. Remember, market was +ve for small & mid-Cap stocks from the day of Election Results (16th May) till Budgets. The BSE Small-Cap & Mid-Cap Indexes, however, turned -ve since the Railway and Finance Budgets. Thereafter, we observed “buy on dips” action in Blue Chip heavyweights since 14th Jul, and the same was continuing till 2 days ago. Since last Thursday, however, even Blue Chip failed to attract buying support. The question now is whether all this could lead to a faster retracement of the preceding rally from 14th Jul to 25th Jul. In the last 4 days, Index has already retraced about 61.8% of the 9-day rally. Last week, once 26K breaks, we mentioned this to be the next crucial event. This only means, next 5 days would be crucial. If the Index breaks its previous lows of 24879-92 within the next 5 trading sessions, i.e. in the coming week, it would amount to faster retracement of the rallying segment, for the first time since Feb’14.  Remember, we had assumed a 7-legged Diametric forming since Feb’14. As per NEoWave, a pattern is confirmed as completed when its last segment is retraced completely in a faster time.  As per NEoWave, any structural changeover usually starts with a bang. Faster retracement of the last segment of an existing structure usually declares violently that the current structure is over, and a structure in the opposite direction has started. Structurally, drop below Jul lows of 24879-92 (Nifty 7422) would mean a 7-legged Diametric structure since Feb’14 is completed, and 2nd “x” or larger F has opened on the downside. Failure to retrace the preceding rally in faster time, however, can keep open +ve structural possibility.  This structural possibility, shown last week in White color on the Daily chart, suggests that “f” is still forming as a Flat. Its lower-degree c-leg has achieved 61.8% ratio with it’s a-leg, price-wise, and 100% ratio, time-wise (both consuming 4 days). For the bullish possibility to unfold next week, Index needs to protect its Jul lows of 24879-92, and turn around preferably by coming Wednesday. Strength and close above previous day would be the 1st indication that the alternate +ve possibility is readying to unfold. We may watch accordingly. This is considered a +ve possibility, because it assumes that an upward “g” is still pending. To reject the bullish alternate possibility shown in White, Sensex needs a faster retracement of the rally from 14th Jul, i.e. drop below 24892 (Nifty 7422). Whether that happens or not is the next parameter to watch in the coming week. 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 16thMay 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, and thus provide a -ve indication to the long-term investors. 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.   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. 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 are slowly coming in both these two. Watch for follow-up. 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. The 1stDiametric 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 ‘2008 onwards 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 1stcorrective. 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, 2nd wave 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 1stwave 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 4th respectively.      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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