August 13,2012 - By Vivek Patil, India's foremost expert in Elliot Wave Analysis Top Stories of the Week Sensex

Sensex gains 2%, testing 5-month highs. IIP contracts by a surprising 1.8% in 'June. Foreign analysts cut GDP growth forecast to below 6%. New FM planning to revive further divestment of listed PSUs. Cutting fuel subsidy can cause 2.6% spike in inflation, says RBI. Hamid Ansari elected Vice-President, gets 490 votes against Jaswant Singh's 238. FM objects to proposal to gift mobile phone to BPL families.

17292+ confirms our Neutral Triangle, watch 17591 and 17700 as crucial next week Last week we discussed, bounce from near the 200-day EMA levels, raising +ve hopes for the coming week Global cues over the weekend are +ve watch for the faster retracement of the latest falling segment from Wed to Fri In case of th faster retracement, the development from 10 Jul high would look like a Neutral Triangle weakness of last 2 days as its e leg Neutral Triangle confirms on faster retracement above d at 17292 (Nifty 5246) within the next two days In case of Neutral triangle, the thrust is usually between 61.8% and 75% Assuming Fridays low was end -point of e, this would project about 17500-600 (Nifty 5300-50) as upside Sensex opened gap-up above 17292 (5246), and was up 529 pts (Nifty 162 pts) by Wednesday. Cooling down 256 pts (Nifty 84 pts) by Friday, however, Index finally ended 360 pts or 2.1% higher for the week. Auto, IT and Metal Indexes rose over 3%, though the broader, Small-Cap Index, finished flat. The action formed a Bull candle on Sensex Weekly chart, the s ize of which was similar to previous week, which, however, carried a small gap-up area at 17292-31 below its bottom.

The action was almost similar to the preceding week. Decent up-move was seen till Wednesday, measuring about 700 pts (Nifty 214 pts) in both the weeks. This was followed by a cool-off of about 260 pts (Nifty 81 pts) from Wednesday to Friday. With similar up-moves and reactions in both the weeks, the move over the last 11-12 days appears perfectly channeled, as shown on the charts. Having observed the similarity, the first question now is whether the market could move up from here, like previous FridayMonday. Remember, previous Fridays action was followed by a huge 104 -pt gap-up open on Monday. The second question would be whether such up-move would be able to take out 17700 (Nifty 5390). Index, remember, failed to take out these levels since March12, i.e. for the last 5 months. Indeed, Index reacted from these highs for about four times in the last 5 months. In the coming week, therefore, we need to see if the Index is able to confidently take out its 5-month resistances. On the Daily Close-Only charts, last weeks highest Daily close was lower even than the one achieved during July. Last week, the thrust out of the Neutral Triangle was considered as a probable x inside a still-developing 2 wave. It nd st st was argued that 2 should consume more time compared to the 1 . Remember, against 26 days consumed by the 1 , the Neutral Triangle consumed only 18 days. It was also pointed out that, in case the thrust turns out to be much larger than 75% of the largest leg of the Neutral rd Triangle, the move could part of the 3 wave inside the bigger c leg, and c may form as a Terminal.
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As was mentioned, a 2 development.

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wave which consumes lesser time than the 1 , and also forms as a Triangle, would indicate a Terminal

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On the other hand, in case the Sensex misses to strengthen much above Friday, and then breaks our rising channel, then nd nd the x label to last weeks thrust would be maintained, and wed expect 2 corrective inside the 2 wave to develop st downwards to sideways, consuming price-time similar to the 1 corrective (Neutral Triangle). However, as long as 16550-650, the area which proved support recently, is protected, wed also expect a 3 wave to nd open, once the 2 is completed. It would only below 16550-650 that we consider more bearish option that the 5-week rally of Jun-Jul was a complete c of D, and E has begun. On one higher degree, inside the a-b-c Flat developing inside D, as was argued much earlier, 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. Time-price potential for c can be calculated accordingly. In case we modify label for the rally to a 3 wave, well initially assume c to be developing as a 1 Extension Impulse, rd st wherein 3 would remain smaller than the 1 price-wise. In summary, firstly wed watch for strength above last Fridays high of 17591 (Nifty 5330), and secondly, for strength above the 5 month resistance of 17700 (Nifty 5390), as crucial events for the coming week. [Technical readings carried forward from previous weeks are shown in italics. Readers can easily identify the new arguments which are written in regular font] Neutral Triangle does not exist under orthodox Wave Theory, which considers only 2 categories of Triangle, i.e. Expanding and Contracting. Under NEoWave, however, Neutral Triangle category is applied when c leg is the largest segment of the Triangle. Neutral Triangle is a 5-legged corrective pattern, marked as a-b-c-d-e. Against Contracting lines for a contracting Triangle, and Expanding lines for an Expanding Triangle, Parallel lines are drawn in case of a Neutral Triangle, as shown on the charts. Neutral Triangle is a five-legged formation in which the middle leg, i.e. c leg, is the biggest leg and a and e tend toward rd equality. The b leg is usually small, and d is much bigger than b. Its channeling would be similar to a 3 Extension Impulse. A parallel is drawn to the b-d from the lowest point of the first drop. All Triangles are made up of 5 legs. If the initial legs are bigger, the shape would look as Contracting. I f the last of the legs are bigger, the shape would look as Expanding. As against this, the shape of a Neutral Triangle is bulging in the middle, which is the result of the middle leg, i.e. c leg, being the biggest leg amongst a-b-c-d-e. The thrust out of any type of Triangle is generally related to its largest leg. In case of a Contracting Triangle, the thrust would be about 100% of its largest leg. In case of Expanding Triangle, it would be about 50 -61.8% of the largest leg. In case of a Neutral triangle, however, the thrust is usually between 61.8% and 75%, more than the expanding type, but lesser than the Contracting type. Assuming Fridays low was end -point of e, this would project about 17500-600 (Nifty 5300-50) as upside. Structurally, the problems of impulsive labels inside the 1 wave, as visible on the Intra-day chart, were pointed out last nd th st week. It was said that there was no alternation between one lower-degree 2 and 4 inside the 1 of c. It was also noted that th lower-degree 5 was also not retraced completely. On one higher degree, we assumed larger D leg began from Dec11 (wave-count-wise from the 9 Jan12), and the same may be
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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. Also, b corrected a by 80% price-wise, and by 161.8% time-wise. From 4 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. The 1 rally from 4 Jun had retraced the last falling segment inside b in faster time, which justified our assumption of c of D upwards. Though c of a Flat could achieve Fibonacci proportion with a leg, anything from 38.2% to 261.8%, price-wise and time-wise, normal expectation would be a 100% ratio. Referring to one more larger-degree structure, we are assuming the 14-month fall from Jan08 to Mar09 as A of a large 7legged Diametric. The 20-month rally from Mar09 to Nov10 is assumed as its B leg. The 14-month fall from Nov10 to Dec11 was labeled the C leg of the larger Diametric, which was a well-channeled Complex Corrective involving two equal-sized correctives. From Dec11, we are into the D leg, which is still on, developing as a Flat. The rally from Dec11 to Feb12 was labeled as a of D, and the same was a well-channeled Double Zigzag, which carried a pattern implication of about 80%. 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. It worked this time as well.
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These a and b legs are part of the D leg which commenced from 9 Jan, and is developing as a Flat, wherein by the definition of a Flat, a is non-impulsive, and b corrects more than 61.8% of a. It did 80%. Once b is over, c should move higher as an Impulse move, and can break the top of a at 18524. We had earlier suspected that the higher degree C leg from Nov10 downwards ended on 9 Jan12 as a Double combination. This leg was also well-channeled, and enclosed a Neutral Triangle (from Nov10 to Jun11) and Contracting Triangle (from Jul11 to Jan12). As we also observed, the 1 and 2 corrective were exactly equal price-wise, both measured almost exactly 3800 Sensex points. This discussion was chartically presented on the Weekly chart of Sensex given below.
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By NEoWave logics, most channeled moves enclose Complex Corrective structures involving x waves. After breaking the 14-month long channel (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. A Non-impulsive C leg could only be part of a larger Triangle or Diametric. Inside this, 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. While A and B were equal-sized price-wise, C achieved time-equality (14 months) with A. The long-term Diametric picture was shown on the chart below.

By NEoWave logics, D leg of a Triangle can retrace minimum 50%, or ideally 61.8%, of the C leg. The 50% level was at 18123. So far, D leg has retraced C by about 57%. 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 . The current meandering phase of the market may be because market is forming D leg, which is the middle, Contracting portion of the larger Diametric formation.

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 matches with the huge gap-up action (refer to Weekly chart discussing 32-week cycle) seen during the 2009.

The chart given below shows equidistant parallel lines enclosing the development since Nov10. Further, it shows how Sensex respected most of its important lows as resistances later. Sensex recovered nearly 12% exactly from this level, and is now testing 17300/17800 levels marked on the chart.

32-Week time cycle The development since Mar09 has followed a 32-week time cycle, as shown on the chart below. This had raised a possibility that an important low was may be formed around 20 Aug. Sensex responded by hitting the th bottom on 26 Aug. This also raised the possibility of an upward/sideways phase that could survive for 32 weeks from Aug11, and end either th st on 4 Feb12 or 31 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. On one higher degree, Extracting Triangle (from Mar09) would make up the larger B leg from Mar09 lows of 8047, which is correcting the 14-month long A leg from Jan08 to Mar09. Time-wise, this B leg ending Feb-Mar12 would consume as much as 261.8% time compared to A, before C leg of the equivalent degree goes down.
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This is an extremely bearish picture, alternative to the larger Diametric scenario discussed earlier, wherein C can fall to test even Oct2008 lows. Above 18000, Right Shoulder become bigger that the Left Shoulder, which may appear rejecting the Head & shoulders or Extracting Triangle argument. However, the 32-week time cycle also matches with the 2-year cycle (already discussed), and may therefore be watched. The Sensex was seen testing the Neckline shown on the chart, which did prove crucial, as Sensex bounced 12% from the Neckline.

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 th e 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 th number of sell-offs beginning Oct07, before it finally topped on 8 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. The lower Blue parallel appears under test once again.

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. See how heavy damages occurred almost exactly from the Grid level at 17800. The next Grid level around 15300 is proving support lately.

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 (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 multi -year 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 nd be labeled as C. Such a-b-c development since Jan08 would be considered part of the 2 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 2 wave within the larger 5 wave. This 5 wave is st suspected to be forming as a Terminal due to absence of impulsive behavior in its internal 1 wave. The Terminal confirms when the Sensex drops below the 2-4 line of one higher degree.
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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 172 00. Break of this long-term 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. st This one was the basis of Forecast for the 21 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 3 (or 5 ) began since Nov84. Its internal 3 was an extended leg, which st th achieved exactly 261.8% ratio to the 1 on log scale. The Sensex is now forming its 5 Wave, and the same is likely to develop as st a Terminal, because its lower-degree 1 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 valuewise, and 261.8% time-wise, as shown below. Since the 5 is now more than 61.8% of 3 , 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 :
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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 5 . Due to the corrective structure in the 1 th leg, larger 5 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 rd th market is into the lower-degree 5th of the SC-degree 3 or 5 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 5 , and would therefore, restrict the upsides to much lower levels than 50K, but end surely above 21000. If the 5 proves to be a Terminal, one larger-degree label of 3 will have to change to 5 , because only a 5 of the 5 can st rd rd th be a Terminal. The Super-Cycle-Degree marking for 1 and 3 shown, would then change to 3 and 4 respectively, as shown in White.
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Weekly Technical Analysis

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.