Weekly Technical Analysis October 01,2012 - By Vivek Patil, India's foremost expert in Elliot Wave Analysis Top Stories

of the Week

Sensex corrects till Thursday, recovers on Friday, ends flat. PMO draws list of reforms which do not require Parliamentary approval. SC rules that auction is not the only method of allocating natural resources. Core sector grows 2.1% in 'Aug against 1% in 'July. S&P lowers India's growth forecast from 6.5% to 5.5%. CVC directs CBI to probe coal-block allocation from the '1993. Centre announces debt restructuring package for power distribution companies. Maharashtra Deputy CM puts in his papers over "Irrigation Scam". Delivery volumes increase from 38% to 43% on exchanges.

Dips provide buying ops, last day recovery testing crucial crucial 18867-70 area [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, market rebounded strongly on Friday created the biggest Bull candle of 2012, which completely retraced the preceding 3-day fall With UPA staying in the saddle, Fridays move almost reminded of 18th May 2009 when UPA got re-elected to power. (Index corrected on the very next day) Technically, Fridays high is seen touching the upper end of the (Blue) channel shown on the Daily chart, which could result in some corrective phase after strong gains of Friday, some cooling off action cannot be ruled out initially during the week. However, dips could provide buying opportunities due to the pending upside targets. Sensex did cool-off initially as suspected. Down 314 points from previous weeks high (18867) by Thursday, however, it once again recovered strongly on the last day of the week. With dips providing buying opportunities as argued, Sensex finally ended flat for the week. While FMCG and Realty Index outperformed with 4% gain, OIL&Gas, Metals and IT Indexes cooled off 1-2%. Small-Cap Index did better than the main Index by gaining 3% for the week.

The action formed a Long Legged Doji on the Weekly chart of Sensex. It shows an almost identical high of 18867-70 for two consecutive weeks. For +ve options to play out, we need strength above this area. On the BSE Small-cap Index, action was lively and formed into a bigger Bull candle for the Week. As we have been discussing separately in this Report, this Index has broken out from 6-7 months of Triangular corrective phase. Back to Sensex, the initial dip during last week appears to be the last part (lower-degree c) of the 4th inside c of larger D. Fridays action retraced the c segment fully in faster time. The Structure is +ve due to Higher Top Higher Bottom continuing to form on the Daily close-only chart. The structure would continue to be +ve until this changes to Lower Top Lower Bottom. By Wave count, and based on the faster retracement logic under NEoWave, we would like to

label Fridays rally as beginning of the 5th wave inside c of larger D. It can alternatively marked as an x of 4th. Until proven otherwise, we may assume the 5th is on its way up, and this assumption should be ok as long as the action stays above assumed end-point of 4th. The problem area, as mentioned initially, lies with the semi-identical tops for two consecutive weeks at 18867-70 (Nifty 5720-35). Further, the oscillator is positioned with a -ve divergence with price. However, in structure which is +ve, the price-action could guide the oscillator to turn +ve. Well be watching for that. In the meanwhile, dips holding the end-point of 4th, preferably the 2-4 line and Yellow channel, could provide buying opportunities. Fridays Bull candle carries a larger upper shadow at its head, almost looking like an Inverted Hammer. An Inverted Hammer type candle can be -ve if the action weakens to close below it. This is because the Shadow area indicates profit-booking at higher levels, and follow-up selling could encourage Bears. For opening further upsides, Bulls need to pierce through this shadow area. Until the shadow area is taken out, we may expect a lackluster trade. The Bias is +ve due to the formation of higher high-low on Friday compared to previous day, and the same would remain +ve as long as this changes to lower high-low on any day from here. Based on the pattern implication for the Irregular C-Failure Flat inside the 2nd wave of c of D, last week we argued that 3rd could achieve about 19500 (Nifty about 5900) by Oct end. As per NEoWave, 161.8% ratio to internal b wave of such a Flat could be projected from its endpoint, as its pattern implication, which is usually achieved within the time period consumed by the Flat. In our case, internal b was from Jul low to Aug high, and the total time period of the Irregular CFailure Flat inside 2nd had consumed 39 days. Projecting these price-time implications calculated to about 19500 by Octend. Inside 3rd wave, drawing lower-degree 1-3 and 2-4 lines show a megaphone shape for the 3rd. This could be indicating a 5th Extension Impulse inside 3rd.

As against 1st Extension Impulse which shapes up like a contracting Diagonal Triangle, the expanding lines, showing megaphone shape, is usually an indication of a 5th Extension Impulse. As explained previously, c of D could achieve an equality with the a of D, and development inside D would look like a Normal Flat with 3 semi-equal legs from Dec11 onwards. This compares with the scenario shown on the Monthly chart below. It shows a multi-year consolidation from 2008 onwards, shaping up like the consolidation phase from 1992 to 2003. The current phase from Dec2011 is marked the contracting D leg of the large Diametric, and the same was compared with the D leg of 1996-97, both marked clearly enclosed inside the Pink-color rectangle.

In the Diametric picture shown above, the square drawn around D had assumed an upside of 80%

retracement level to C price-wise (because it was a Double Combination with 80% pattern implication), and Dec12 time-wise (as shown by the line on the right side). This would allow D to develop as a Common Flat consuming a total period of about 12 months, which will be in proportion with the D leg shown during 1996-97 inside the previous Diametric. After breaking the 14-month long channeled C (from Nov10), we suspected that current rally has potential to be marked as D leg of a much larger Triangle or Diametric from 2008. This option was preferable because C leg from Nov10 was not an Impulse, as was shown on the chart below. A Non-impulsive C leg could only be part of a larger Triangle or Diametric.

Inside the larger Diametric from 2008, the larger A leg was from Jan2008 to Mar2009. The B leg was from Mar2009 to Nov2010. The C leg came down from Nov2010 to Dec2011, as a channeled fall (Complex Corrective) with two equal standard correctives, and consumed time equal to A, i.e. 14

months. Inside the a-b-c Flat developing inside D, we argued c could achieve anything from 38.2% to 161.8% ratio to a (Dec-Feb rally), price-wise, and consume minimum 50% time compared to a and b put together. *c has now achieved 61.8% price-ratio to a and 50% time-ratio with a+b+. We assumed larger D leg began from Dec11 (wave-count-wise from the 9th Jan12), and the same may be developing as a Flat. Its a leg was a channeled Double Zigzag till Feb12, and b was a channeled Complex Corrective enclosing 2 Diametric formations. Inside D, b corrected a by 80% price-wise, and by 161.8% time-wise. From 4th Jun low of 15749 (Nifty 4770), Sensex is assumed to be forming c of the Flat, which should be the last Impulsive wave of a 3-3-5 structure inside the Flat. By NEoWave logics, D leg of a Triangle or Diametric can retrace minimum 50%, or ideally 61.8%, of the C leg. D of a Triangle or Diametric can even retrace as much as 80% or more of C leg. However, if our assumption of larger formation from 2008 being Triangle or Diametric is true, D could remain smaller than C, i.e. not cross Nov10 high of 21109. See the D leg marked during 1996-97 on the chart. One may also note that the D leg during 1996-97 corrected 98% of C, and internally developed as a Flat, wherein b had retraced a completely. We can see both the D legs as marked in Purple squares for the comparison, which is the middle segment, or Contracting portion of the larger Diametric formation. While the orthodox Wave Theory gives importance to 61.8% retracement level and calls it a Golden Ratio, NEoWave Theory considers 80% also as another important retracement level, especially after channeled moves. As the chart below depicts, since Nov10 it has been generally useful to consider 61.8% to 80% retracement area as crucial for terminating corrective phases. For the 1st time, action has now moved beyond the 80% mark. D has already retraced 61.8% of C. We are now looking at the possibility of D leg retracing about 80% of the C leg.

By NEoWave logics, most channeled moves enclose Complex Corrective structures involving x waves, and carry a pattern implication of 80%.

Yearly lows Sensex has broken 2010 low of 15652, and now in 2012 is found holding the 2011 low of 15136. As the past instances would show, once the yearly low gets broken, a minimum of 20% cut from the low has been a usual phenomenon, though gradually. A 20% magnitude reduced from 15652 would calculate to about 12500 for Sensex. This level has not been touched so far, but should be remembered as a crucial level which matches with the huge gap-up action (refer to the Weekly chart discussing 32-week cycle) seen during the 2009.

32-Week time cycle The development since Mar09 has followed a 32-week time cycle, as shown on the chart below.

This was used for raising a possibility that an important low would be formed around 20th Aug11. Sensex responded by hitting the bottom on 26th Aug. This cycle had also raised the possibility of an upward/sideways phase that could survive for 32 weeks from Aug11, and end either on 4th Feb12 or 31st Mar12, developing as a ranged movement like the Left Shoulder. The upward phase ended during Feb12 as per this cycle. Going by the structural possibilities from this cycle, it was suspected that Sensex could be forming an e leg of a possible Extracting Triangle, which would remain smaller than the c leg. The e leg did remain smaller as suspected. As we already know, Extracting Triangle is a pattern which shows smaller rallies and bigger drops. Thus in one direction, it shows e < c < a, and in the opposite direction, it shows d > b. Above 18000, Right Shoulder became bigger that the Left Shoulder, which appeared rejecting the

Head & shoulders or Extracting Triangle argument. However, the 32-week time cycle may remain valid as a cycle even from here. The Sensex was seen testing the Neckline shown on the chart, which did prove crucial, as Sensex bounced several times from the Neckline. Another idea would be to mark the entire development as a Diametric, instead of Extracting Triangle, and the same is now marked on the chart. These assumptions indicate an incomplete B, but confirms only on faster drop below the Neckline, which is still awaited. 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 Oct10. This played out well as suspected. Indeed, as was observed, 60% of stocks topped out during Oct10 itself, and many have already shaved off much more than 30%, though Sensex itself shaved off only 28%.

Comparison with Jan'08 top formation We compared the 2010 topping formation to the movement from Oct07 to Jan08, a 2.5 month period just before the high of 21206 was hit on Sensex. This was also an extremely volatile period of nearly two months, just before the market actually topped out. The following chart of 2008 period shows two equidistant parallel channels. The Sensex broke above the original channel and achieved an equidistant height at the upper parallel, before reacting lower into a bear phase. One may observe the volatile development once it reached closer to the upper parallel. Inside this volatility, the market faced number of sell-offs beginning Oct07, before it finally topped on 8th Jan08.

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

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. Though the Grid level around 15300 did prove support lately, Index is now breaking the 17800 grid level.

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, longterm has always meant 4 years in Indian context. Remember, Sensex rallied 11-fold from 390 (Mar88) to 4546 (Apr92) in four years, after which it consolidated for 11 years from 1992 to 2003. In 2008, it completed another 4-year rally from 2003, during which Sensex rose 7-fold from 3000 levels to 21000. It may now consolidate for 7 year, beginning 2008, preferably forming as a Triangle or Diametric. We explained that the 14-month fall from Jan08 was a Triple Combination A leg of a large multiyear consolidation. The corrective phase beginning Mar09 retraced about 99% of the previous fall from 21206 (Jan09) to 8867 (Mar09), (which was labeled as a Triple Combination). The longer time required while rallying is symptomatic of its corrective label of B.

The rally from 8047 (actually beginning at 8867) was, therefore, considered as the B leg. The next leg downwards would be labeled as C. Such a-b-c development since Jan08 would be considered part of the 2nd wave of what appears as a probable Terminal beginning 2003. Even though we saw the market reaching levels above Jan08 highs, the multi-year consolidation is expected to shape up like a large decade-long Diametric, looking similar to the consolidation we saw from 1992 to 2003. Our trading/investment strategies should be designed accordingly. The suspected corrective phase beginning Jan08 would be the 2nd wave within the larger 5th wave. This 5th wave is suspected to be forming as a Terminal due to absence of impulsive behavior in its internal 1st wave. The Terminal confirms when the Sensex drops below the 2-4 line of one higher degree. One may see the Yearly chart in Appendix, which shows the 2-4 line and its values for the next three years. Remember, Terminal development usually violates the 2-4 line. The Sensex is assumed to be under the influence of a large 8-year cycle ever since its birth. As shown on the chart below, '1984 was the beginning of 8-year long bull-run till '1992. In our Super-Cycle Degree count, shown on ASA Long-Term chart under a separate paragraph, weve considered 1984 as the beginning point for the most dynamic 3rd wave. The next two important turning points occurred exactly 8 years thereafter, in '1992 and '2000. Both these turning points were marked by stock market scams, because of which, the leaders of the rally had extremely difficult time later. For example, ACC, the leading stock of '1992 bull market, remained below its highs till end of '2004. Similarly, the IT stocks, which were leaders of '2000 rally, lost as much as 90% of their top valuations by the year '2003. During 2008, we were sitting on this very important cycle, which therefore, threw up similar possibilities. In the previous 8-year cycle top during 1992, Sensex lost 57% from 4546 to 1980. In the next cycle top, the cut was almost 58% from 6150 in 2000 to 2594 in 2001. We had, accordingly, targeted sub-10k levels for Sensex price-wise during 2008-09, and a minimum of 13 months into bear phase, time-wise. The price-time targets were achieved as Sensex dropped 63% from 21206 to 7697. The yearly channel, shown below, which was used earlier to project 20000

level for the Sensex during 2007, was broken when the Index moved below 17200. Break of this longterm channel also weighed in favor of a larger corrective phase following this 8-year cycle.

Appendix : Long-term scenarios for Sensex As for the larger-degree wave-scenarios, I consider two alternatives : The first one assumes that a large Triple Combination corrective, beginning Sep'1994 got over in Oct'2005 at 7656. The last corrective within this Complex Corrective phase formed as a "Non-Limiting" Running Triangle. This has been my preferred scenario for many years, which I had assumed to be under development since I began long-term forecasting during 1997-1999. This one was the basis of Forecast for the 21st Century article published in Business Standard (which can be read on vivekpatil.com).

This scenario also combines well with the traditional channeling technique. Sensex followed a parallel channel for 11 long years from Apr'1992 to May'2003. As I had shown, if one projects the width of this channel on upper side, such a projection also gave 20000 as the minimum target. This forecast was achieved. This scenario is shown on the chart given below :

As per my second alternative, a Super-Cycle-Degree 3rd (or 5th) began since Nov84. Its internal 3rd was an extended leg, which achieved exactly 261.8% ratio to the 1st on log scale. The Sensex is now forming its 5th Wave, and the same is likely to develop as a Terminal, because its lower-degree 1st wave since May03 developed as a Diametric (a corrective structure rather than an impulse). Within the non-directional legs, 2nd was exactly 61.8% of 1st value-wise, and 161.8% time-wise. The 4th was 38.2% of 3rd value-wise, and 261.8% time-wise, as shown below. Since the 5th is now more than 61.8% of 3rd, it may lead to a "Double Extension" scenario, wherein both 3rd as well as 5th would be extended waves. This scenario is shown on the the chart given below

Development from May03 is a 7-legged Diametric formation, marked as a-b-c-d-e-f-g. It is called "Diametric" because it combines two Triangular patterns, one initially Contracting up to the "d" leg, followed by an Expanding one. The contraction point is the "d" leg, and the legs on either sides of it tend to be equal. Accordingly, "c" and "e" were equal in "log scale", both showing about 60% gains. Similarly, "g" was equal to "a", both showing about 115% gain.

. The Diametric development from 2003 to 2008 has been considered as the 1st of the 5th. Due to the corrective structure in the 1st leg, larger 5th could be developing as a Terminal. Since 2008, we are into its 2nd wave, which could continue to develop over 8 years from 2008. The "Double Extension" scenario was also shown on following ASA Long-term Index (chart below). I've created this chart combining Index compiled by a British advisor (from '1938 to '1945), RBI Index ('1945 to '1969), F.E Index ('1969 to '1980) and Sensex (thereafter till date). The wave-count presented on ASA Long-term Index favors the alternate wave-scenario discussed above. The labels show that the market is into the lower-degree 5th of the SC-degree 3rd or 5th wave. If a "Double Extension" unfolds, Sensex could be projected to achieve even 50000+. A break of 2-4 line would confirm the Terminal development inside the 5th, and would therefore, restrict the upsides to much lower levels than 50K, but end surely above 21000.

If the 5th proves to be a Terminal, one larger-degree label of 3rd will have to change to 5th, because only a 5th of the 5th can be a Terminal. The Super-Cycle-Degree marking for 1st and 3rd shown, would then change to 3rd and 4th respectively, as shown in White.

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