[July 14, 2014] Vivek Patil - Weekly Technical Analysis

[Mayur Patel]

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

  
 

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Weekly Technical Analysis 14 July 2014 - By Vivek Patil, India's foremost expert in Elliot Wave Analysis   Top Stories of the Week Sensex reverses post-Budgets as suspected, loses 3.6%. Rail stocks take the beating, hit lower circuits post the Rail Budget. Power/Capital Goods/Realty/PSUS/Metal/Bank Indexes lose 7-10% each. Broader market collapses 7-8%.  FM says all cases of retrospective taxation will be scrutinized CBDT committee. FDI Cap in defense sector raised to 49%. Personal Tax exemption raised by Rs.50000 to Rs.250000. Investment limit u/s 80C raised from Rs.1 lakh to 1.5 lakh. Deduction against Housing Loans raised from Rs.1.5 lakh to Rs.2 lakh. 15% Investment Allowance for Plant & Machinery above Rs.25 crs. Kisan Vikas Patra to be re-introduced. Tax on Debt Funds raised to 20%, FMPs take hit. 'May IIP at 19-month high of 4.7%. 43% deficit in rains till Jul raises fear of drought. Profit-booking post-Budgets takes Sensex 3.5% lower, broader market tanks 7-8% [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 c-leg can achieve 61.8% to 100% price-ratio with the a-leg … c-leg has almost achieved 100% price-time ratio with a-leg already … there is nothing against c-leg achieving ratio higher than 100%. The question is whether it would … The c-leg is smaller and slower as compared to the a-leg … achieved only 85% price ratio in 100% time … see if the Budget expectations could stretch the c-leg further, OR we are in for completion of c-leg … Faster drop below last Wednesday’s gap would be considered an initial -ve signs … Whenever there is built up in expectations, post-event profit-booking is normal. We saw that on the day of Election Results … watch the response of market participants to the Budget …” Sensex moved +ve on Monday, which was mainly on a/c of gains on its heavyweight Infosys. After hitting a new high on Tuesday just before the Rail Budget, Index reversed 695 pts on the same day, post the Budget, and generated a faster drop below previous Wednesday’s gap-up area. Attracting profit-booking once again post Finance Budget on Thursday, Index finally finished 938 pts or 3.6% lower for the Budget week.  While Sensex lost 3.6%, and formed a bearish Dark Cloud Cover pattern on its Weekly chart, the broader market saw a bigger cut. The BSE Small-Cap and Mid-cap Indexes tanked as much as 7-8%. All the sectors which had earlier attracted buying on the Budget expectations, attracted huge profit-booking. The Rail stocks, for example, started hitting lower circuits immediately after the Rail Budget. The Power/Capital Goods/Realty/PSUS/Metal/Bank Indexes lost 7-10% each during the week. Last week, we suspected post-event profit-booking, and considered it to be a normal phenomenon. The question is whether, when and at what levels buying can re-emerge. As on Friday, Sensex has created four consecutive 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 23rd Jun 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.  The bias is currently -ve after four consecutive lower lows. If the downwards action fails to get arrested within a day or two, as discussed above, history shows that the drop could then continue and stretch to as much as 8 trading sessions.  All this would mean that Sensex could generate a relief rally either on Monday or Tuesday, failing which, it would do so on Thursday or Friday of the forthcoming week.  Structurally, the c-leg of “e” could not stretch itself much beyond 100% ratio to a-leg. Last week’s reversal is, accordingly, marked as “f” of the Diametric we suspected was forming inside the 2nd Corrective since Feb’14. Any relief rally we discussed above would be the last, i.e. “g” leg, of this Diametric. 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 last week’s high. In case, however, any such relief rally shows strength continuing beyond 2-3 days, it would be a “normal” “g”, which can hit another fresh high for the Index. However, if the fall continues “violently” for the next 4 days or more, and also breaks below 24687 (Nifty 7375), then it may open bearish possibilities shown by the White labels on the chart. White alternate labels show that the Diametric we assumed in the 2nd Corrective is completed at last week’s high. So, drop below 24687 (Nifty 7370) could be either 2nd “x” OR the larger G. Note that 24687 (Nifty 7375) is a level below which the current fall would turn out to be the biggest fall inside larger F.  As can be seen on the chart above, since Aug’13, 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. Also, structurally since May’14 low of 22277 (Nifty 6638), both rallies as well as drops on Index were getting smaller. A bigger fall below 24687 (Nifty 7375) would mean break-down from this “contraction”, a -ve sign structurally. Last week’s drop so far measures 1073 pts on Sensex, i.e. it is 430 pts short of the drop seen on the day of Election Results, which had measured 1503 pts. As long as current drop remains smaller, i.e. holds 24687 (Nifty 7375), we can end “f” and open an upward “g” as a relief rally. Structurally, since Feb’14, Index is yet to retrace any of its rallying segment (not necessarily a wave) completely in a “faster” time.Market has generated initial -ve indications by dropping below the last significant gap-up area of 2nd Jul.  Sensex is already into “f”, and the last leg of the Diametric, i.e. “g”, may still be pending. However, “g” is the last leg and can be a quick affair. As discussed above, it can even end at a “Failure” point. Under the circumstances, investors have enough reasons to worry, especially if FIIs push sell button further. We earlier listed such FII action as a risk factor. Broader market was outperforming after 16th May, and the same is now displaying high-beta under-performance on the downside. Most of these stocks may, however, be local plays, and do not get reflected on Sensex. When we turned +ve on the broader market from May onwards, we cautioned that these stocks can turn back as fast. The broader market has already broken down after Budgets. All in all, Index appears maturing near the upper end of the channel enclosing the up-move since Aug’13, as was shown on the following chart. The channel encloses larger F from Aug’13, consisting of two Diametric corrective patterns joined by “x”. It was pointed out that the 2nd Corrective achieved “external” equality with the 1st Corrective at 25376 on the day of Election Results. Once the 2nd Corrective Diametric is confirmed over, 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.  The first formed during Aug’13 to Jan’14, “x” completed in Feb’14, and 2nd Diametric is forming thereafter. Inside the 2nd Diametric, we are assuming its “e” is currently forming, and “f” and “g” legs are still pending. The 2ndDiametric could complete somewhere around 15th Jul’14, when it would achieve time-equality with the 1st Diametric. Diametric is a 7-legged pattern, marked as a-b-c-d-e. Until all the legs of the pattern, i.e. e-f-g, are completed, market may continue to provide selective +ve opportunities. Last week’s action was below the support line joining previous two lows of 8th May and 30th May. Structurally, this line would be b-d line of the Diametric structure we are assuming. Sensex is, however, seen holding the channel drawn on the chart above. If the “e”, “f” and “g” 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 above. Investors can hold till it is confirmed that the “g” leg, and therefore the 2nd corrective as well as larger F is over for good. The structure inside the larger F from Aug’13 onwards is well-channeled, a Complex Corrective consisting 2 Correctives, i.e. 2 Diametric patterns, as shown on the following chart. As per NEoWave, such channeled development is generally indicative of Complex Corrective involving x-wave. It was also pointed out that the 2nd Corrective achieved “external” equality with the 1st Corrective at 25376 on the day of Election Results.  A question was, accordingly, raised if the 2nd Corrective got completed on that day. However, we now wait for “e”-“f”-“g” legs of the 2nd Corrective Diametric to complete near the upper end of the channel : Once the 2nd Corrective is confirmed over, Sensex may test lower end of the channel enclosing F. 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 complete as Double Diametric, and the larger downward G has opened. In the meanwhile, investors may keep a tab on the risk factors. A major event (Election Results) is now behind us. Hope rally has already played out. FIIs selling off is a risk factor. 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. For  India , the  Iraq  factor appeared more significant recently. 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, like last week. Faster downside retracement of “g”, the last leg of the 2nd Corrective, would provide NEoWave confirmation of topping formation. As long as the Index holds above its Election Result Day low of 23873 (Nifty 7130), we may assume 3 more up-down legs, e-f-g, are still left to form on the main Indexes. Profit-booking on the day of Election Results came 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.  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.  The recent high of 25376 was also 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.  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 over, and larger G would go down from here.  We, accordingly, 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 of 25376 (Nifty 7564), 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 price-wise, and beyond 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. Structurally, on one higher degree, we have been considering that after the major top was made during the year ‘2008, Sensex is forming a 7-legged Diametric phase thereafter. 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, one can see Sensex crossing previous highs, indeed taking their support for reaching further newer highs for the F leg :  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.  Coming back to the Complex Corrective development inside F from Aug’13 onwards, we have already explained F would consist of 2Diametric patterns, joined by “x”. Such small “x” joins 2 correctives, and it can correct maximum 61.8% of 1st Corrective. Thus, if the 1st Corrective completed from Aug’13 to Jan’14, “x” could drop maximum to 18990 (61.8% of rise from 17449 to 21484).  The 19K level, was also the value of the Monthly trend line joining the lows of May’2003 and Mar’2009. Note, the Base-line shown on the chart below, provided support during Aug’13.  The Jan-Feb’14 fall was, accordingly, marked as x-wave inside the Complex Corrective F leg.  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 was shown on the chart below. 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, its 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.  Multi-Year long Diametric Formation It was argued that all multi-fold rallies would be followed by multi-year long consolidations. Sensex, remember, rose 11-fold during ‘1988 to ‘1992, but entered a 11-year consolidation thereafter. Again, during ‘2003 to ‘2008 it multiplied 7 times. Drawing similarity, it could a 7-year consolidation starting ‘2008. Further, the consolidation, may shape up like a 7-legged Diametric, similar to the consolidation seen from ‘1992 to ‘2003. The Diametric formation from ‘2008 is also suspected because each of its internal legs, except B, have consumed about 13 months so far. So, the E wave from Jan’13 could also continue for about 13 months, and end somewhere around Feb-Mar’14. This long-term picture was fist published on 6th Feb’2012, with both D legs highlighted in Purple color rectangles. In the previous instance, the D leg during ‘1996-97 had retraced as much as 97% of its preceding C leg. In the current instance, D retraced 84% of C. Long-term corrective phase on Dow’s chart from the year '2000 onwards also appears to be a probable 7-legged Diametric.Instead of “Bow-Tie Diametric” on Sensex, Dow’s Diametric is shaping up as “Diamond-Shaped Diametric”. NEoWave Discussions Inside the D leg from Dec’11 to Jan’13, we had had assumed a 3-legged a-b-c Flat. The “c” part was a 5-legged Impulse, inside which,5th leg (beginning Nov’12) was assumed to be a Terminal. Based on NEoWave requirements, it was argued that Sensex would drop below Nov’12 lows in 50% time of the 48-day long Terminal. Index eventually did drop below Nov’12, but took 48 day or 100% time (instead of 50%). As an abundant precaution, therefore, following alternate wave-structure was suggested for the D leg from Dec’11. D is now completing 161.8% time ratio to C.  In the alternate scenario, “c” ended at Oct’12 high, and it was equal to “a” leg. The “d” was the smallest segment, and “e” (i.e. post-Nov’12 rally) was a “Double Combination” which ended in Jan’13. The post-Nov’12 rally is retraced by 100% on Sensex, but more than 100% on broader indices. The larger picture of Diametric from ‘2008 onwards is, therefore, considered probable.  That would mean 13-month long D-leg has ended at Jan’13 highs, and 13-month long E-leg started thereafter.  NEoWave, remember, allows exceptions to rules at important market turning points or under “unusual” conditions, like end of larger patterns or last wave, such as a Terminal.  Also, Triangles and Terminals are exceptions to virtually all rules. Since Diametric pattern is made up of Triangles, NEoWave “Exception Rule” is also applicable to these patterns.  Since we were at an important turning point in Jan’13, and dealing with Terminal and legs of Diametric, perhaps pattern implication rules could not be satisfied to the full extent. Does it really matter whether the Sensex achieves the pattern implication accurately within the time-price parameters, when the general direction of the secular market has been largely -ve as we suspected since Dec’12 ? As we argued, the larger bear phase is already visible in the broader market. Since ‘Dec’12 we turned cautious as the rallies were getting smaller (shaping into a Terminal), and also because of the ‘Jan-topping cycle (discussed separately). Terminal we assumed from Nov’12 to Jan’13, is a special kind of Impulse which occurs in the last wave position, i.e. either as “c” of Flat/Zigzag or 5th of an Impulse. Its internal structure is made up as 3-3-3-3-3, instead of usual 5-3-5-3-5.  In other words, each leg of a Terminal would develop as a 3-legged or 5-legged “corrective” structure, like a Flat, Zigzag or Triangle. Also, 4th of Terminal must enter the area covered by the 2nd (Overlap Rule). A line similar to the 2-4 line on Sensex can also be drawn on the broader indices, and the same has been broken (as discussed separately). Sensex, consumed 59 weeks to retrace 84% of its preceding 13-month fall, which also was a 59-week affair, as shown on the chart below : The rally, accordingly, was considered slower, corrective structure as per NEoWave, and not as part of any fresh rally. The channel enclosing the a-b-c Flat inside the larger D leg from Dec’2011 onwards was shown on the chart below : The 80% retracement level was considered and marked as a pattern implication for the 13-month long Double Combination move marked as C. Pattern implications, however, cannot be strictly enforced for the legs of Triangle and Diametric, which are exceptions to the general rules.   As per NEoWave, most channeled moves enclose a Complex Corrective structure involving “x” wave. Complex Corrective involving 2 correctives, joined by one “x” wave, is called a Double Combination, and carries a pattern implication of not more than about 80%.  Note that the C leg of Sensex, from Nov’10 to Dec’11, was a Double Combination, with two equal-sized correctives (see weekly chart given above), and therefore, carried a pattern implication of 80% retracement by the D leg.  Further, as depicted on the chart below, since Nov’10, it has been generally useful to consider 61.8% to 80% retracement area as crucial for terminating moves. As 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 also a 3-3-5 pattern where “a” and “b” carry corrective label of :3, and “c” is an impulse label of :5. Around 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 should normally end near such parallel. The channel indicates similarity of its 3 internal legs, reason why Flats are called Flats.  Inside “c” of D (beginning Jun’12) for Sensex, we were expecting a 5-legged Impulse, because Flat is a 3-3-5 structure.  As per NEoWave “Extension rule”, one of the directional leg inside an Impulse should get “extended”, i.e. achieve 161.8% ratio to the next largest leg.  Since 1st and 3rd were “normal”, we could have projected 5th wave Extension. However, such a move would project values slightly above the Nov’10 highs, which would jeopardize the larger assumption of “Bow-Tie” shaped Diametric from ‘2008 onwards. We, therefore, preferred 5th of “c” not to achieve 161.8% ratio, but terminate below Nov’10 highs, from where a downward E would open. Since E begins the “expanding” phase of the Bow-Tie Diametric, it would break below Dec’11 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 end somewhere in the month of Dec’12 or near to it. As the beginning part of 5th shows violence on upside, we suspected 5th could develop internally as a 1st Extension Impulse or Terminal. Since a “Terminal” always occurs at major turning point, it would be able to generate the necessary downside power for the larger E leg. In the 7-legged “Bow-Tie” shaped Diametric from ‘2008, one can see a reduction in magnitude from A leg to D leg. The D leg is the smallest segment of the Bow-Tie shaped Diametric. The other half of this Diametric, i.e. E-F-G legs, should show expanding magnitudes, and therefore, E should become larger than the D leg. This can happen only when E breaks the bottom Dec’2011. After breaking the 13-month long channeled C (from Nov’10 to Dec’11), we had suspected that development post Dec’11 has potential only to be marked as D leg of a much larger Triangle or Diametric from ‘2008.  This option was preferable because C leg from Nov’10 was not an Impulse. A Non-impulsive C leg could only be part of a larger Triangle or Diametric. BSE Dollex-30 Index Meanwhile, since the FII activity turned a prominent factor in the Indian stock market, we examined the development of BSE Dollex-30 Index. This Index shows Dollar-Value of Sensex, and is currently 37% lower than the actual Rupee-Value of the Index. The Index is now attempting to break above the Red resistance line, as F attempts to show “expansion”.   30% Principle  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 ‘Oct’10. This played out well as suspected. Indeed, as was observed, 60% of stocks topped out during ‘Oct’10 itself, and many have already shaved off much more than 30%, though Sensex itself shaved off only 28%.   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. Index during ‘2013 reacted thrice from the Grid level at 20250, and later held the Grid level. The next Grid level of 22700 was targeted and the same is now achieved. Watch if Index mature at the next Grid level of 25150. The larger picture 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 (Mar’88) to 4546 (Apr’92) 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 Jan’08 was a Triple Combination “A” leg of a large multi-year consolidation. The corrective phase beginning Mar’09 retraced about 99% of the previous fall from 21206 (Jan’09) to 8867 (Mar’09), (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 Jan’08 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 Jan’08 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 Jan’08 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, we’ve 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 : 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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[Vikas Malpani]

Pls post 21 July review of Vivek Patil Ji.
Regards
Vikas