MARKET BASE VALUE FOR SENSEX RALLY

The rally post-15652 may be considered "g" of Diametric since Mar'09

Last week's late fall was considered “c” of the 2nd corrective inside what was assumed as a
Double Combination fall post-17790. Remaining parts of the 2nd corrective were expected
to complete before the required faster retracement of falling segment is visible.

Sensex moved flat till Thursday, completing the remaining legs (i.e. “d” and “e”), before the faster
retracement of the last leg (i.e. “e”) came in on the last day of the Week, which was the 1st
day of the New Settlement and also the Budget Day.

While the Sensex finished 238 points or 1.5% higher for the week, Metal - Banks - Cap. Goods
- Auto Indexes gained by about 2.5% of more. FMCG Index proved the biggest loser, down 3.3%
mainly due to post-Budget loss of over 6% on ITC. Small-Cap Index shaved off 1.7%. Autos
and NBFCs proved biggest gainers after Budget. REC turned around by a hefty 13% due to
short-covering.

The action formed a bull candle, although with an upper shadow. On its Daily chart, Sensex
closed at the Neckline of what looks like an Inverted Head & Shoulders bottom formation .
Index should, therefore, move positive as long as it maintains this Neckline, although its
immediate resistance will be at about 16708.

Structurally, Index completed the Double Combination post-17790, as was assumed, with 2nd
corrective completing as a Triangle. 

The month of February’2010 is now over, and Sensex has been able to hold the 15331 level
during the month, which was considered crucial. 
Since the fall post-17790 is not an Impulse but a Double Combination, a structure
previously assumed as “Alternative” takes precedence. This structure assumed a 7-legged
Diametric from Mar’09 lows.

This Diametric shows time similarities among directional legs (10-13 weeks) as well as non-
directional legs (3-5 weeks). Price-wise, each subsequent rising leg has been 55% of
previous rising leg, whereas all falling legs have been shaving off about 2000-2500 points.

Going by the ratios, “g” leg can achieve 55% of “e” (which calculates to 17K) in about 10-13
weeks time. Pattern implication for a Double Combination fall is no more than about 80%,
which calculates to 17200-400. 

Since these targets would not be much from the existing levels, “g” leg is likely to be a tepid
(even tricky) affair and also a “Failure” leg of the Diametric.

The 17K level is also crucial due to other technical reasons. Sensex has left a falling gap
unfilled at this level, and it is also 61.8% retracement level to post-Jan fall.  

The most bullish option would be marking the move from 17493 (Oct’09 high) as an
intervening “x” wave. However, this option can confirm when we see a faster retracement
above 17790.

From Mar’09, the legs of the Diametric have shown reduction in magnitudes in both
directions. Thus, within directional legs, “e” < “c” and “c” < “a”. Within non-directional
legs, “f” < “d” and “d” < “b”. 

A leg, either directional or non-directional, turning bigger than previous leg, price-wise or
time-wise, could indicate a major structural shift for the medium term.

As pointed our earlier, “B” leg of a Triangle can form as a 3-legged pattern (Zigzag or Flat) or as a
7-legged pattern called Diametric. We cannot mark “B” as a 5-legged pattern, i.e. Triangle.
Failure to cover the falling gap of 22 nd Jan, at 17000-25 on “closing” basis, could provide
an advance indication of weakness (and that too, at a higher level). 

The implications of “g” finishing off as a “Failure” leg would bring in the implications of 2-
year cycle, described elsewhere in this Report, which would indicate a major top having been
formed already near 17790. 

[Technical readings carried forward from previous weeks are shown in italics. Readers can easily
identify the new arguments given in regular font]

Going by my 6-month old arguments : (1) the PE ratio is touching maturity level under normal
conditions of the market (2) Sensex has doubled from its bottom levels (3) the main
buying force, i.e. FII investment, has been generating reducing returns (4) Daily Oscillators
are on –ve Divergence (5) Weekly Oscillators are in negative mode.

These arguments have ensured that whatever euphoria we saw in the market was limited
only to select individual stocks. Sensex itself has been oscillating around 16000 level for
last nine months since Jun’08. 

Even if we see bullish alternatives taking over by way of faster retracement above 17790, the
current rally would still be labeled as the “b” leg of the multi-year larger Diametric structure
from Jan’2008, just like the large consolidation we saw from ‘1992 to ‘2003.

As can be seen on the Monthly chart of Sensex given below, the current rally has a
questionable base-line. 

All previous rallies on Sensex maintained the base-line, break below which led to a sizable
price-time correction. The ‘2009 rally, therefore, turns out to be unique in nature, somehow
holding higher so far. 

Going by historical examples of base-lines, benefit of doubt may be extended till the 3rd
change in the base-line, holding which, Sensex could still move higher towards 22000 levels (as
“b” becomes part of a Diametric instead of Triangle, as explained elsewhere). 

The ‘Jan/Feb candles are completely below the 2nd line, and therefore, unless it
immediately pushes above it, it would face danger of dropping to the 3rd line.
However, break below 3rd such base-line (value of which for ‘Mar’10 is close to 15300),
should signal the end of the larger “B” leg (beginning Mar’09). Example of the rule of “3” is
shown on the Monthly chart of Dow below :
The following chart compares last two rallies out of major downswings (which saw near-
60% erosion in valuation), during ‘2003 and ‘2009. Both rallies are similar in terms of the time
consumed and gains registered, both gaining about 115% in about 8 months.

On its maturity, the ‘2003 rally got retraced by 60% in 60% time, dropping to 4227 before the
next move. If the current rally matures at the current levels, it could also show a 60%
retracement (11850) by March’2010.

As I have been saying, “Will the history repeat itself ? Whether this happens or not, we
need to be cautious on this front.” The caution certainly paid off as Sensex lost over 2000-
points recently.
The 1st quarter of every 2nd year has proved a turning point on Sensex’. Beginning Jan’1980,
most of the turning points can be seen occurring during Jan-Mar period of an even year,
as marked on the chart.

We are now in the 1st quarter of ‘2010, which is an even year, therefore, at a turning point
as per this 2-year cycle.
After showing falling volumes since 18th May, On Balance Volume (OBV) chart had shown
a positive break above the Yellow resistance line. 

OBV currently appears holding the Green line shown last week.
Sensex maturing near 17500 would support my argument that market usually corrects
after doubling. Ratio of 200% can be seen even for all the first rallies coming out of bear
phases :  

- After a 24-month bear phase during 1986-88, Sensex doubled from 390 to 798 and went into
sideways consolidation for about a year before moving further up.  

- After a 13-month bear phase during 1992-93, Sensex doubled from 1980 to 4643 and went into
sideways consolidation for about four years before IT bubble happened in 2000.  

- After a 39-month bear phase during 2000-03, Sensex doubled from 2904 to 6250 and saw a
quick 60% retracement before resuming the bull phase.  

Remember, 17500 is about twice the value of Oct’08 low of 7697 or ‘Mar low of 8047.  

I also explained my PE Ratio argument previously. I argued, “At its highest level of 15600
on Sensex, PE Ratio had reached 21+, which is near the maximum figure of 22 seen under
‘normal’ circumstances. Only bubbles can push it higher towards 28. Such bubbles
happened during ‘2000 and ‘2008, which were 8-year cycle tops. It takes 8 years to build a
bubble. Bubbles have never been seen in two consecutive years.” Currently, as of this
Friday, the PE ratio improved marginally to 20.92 (against 20.72 last week).

Previously, I assumed end of Triple Combination since Jan’2008, finishing at 8867 (20th Mar'09).
Since Triple Combinations can occur only as a largest leg of Triangle, I contended that “we may
be into the next upward wave, ‘b’ wave, which could correct the 14-month long Triple
Combination by as much as 50%.” Under Neo-wave Theory, 70% is the pattern implication
for any Triple Combination.

However, I said “In Triangles, one can only have guesstimates. Triangles are exception to
virtually all rules … As a general rule, one can say that 3 out of 4 retracing legs of a Triangle
would retrace a “minimum” of 50%. (This ratio was, accordingly, used for projecting 14500
earlier).
The rally from Mar'09 did an exact 70% retracement to 14-moth fall. If the Sensex moves
decisively beyond 17500, then the “b” leg can even travel further up, perhaps testing
Sensex’ 2008’highs.  

In such a case, Sensex will go into a longer consolidation, lasting a decade or more, (similar to its
consolidation seen during ‘1992 to ‘2003), though at a higher range contained within equidistant
the parallel channel drawn for 1992-2003 period, and shown elsewhere (in Yellow color on a
monthly chart).  

The current “b” leg, in such a case, would become “b” of much larger Diametric (instead of “b” of
Triangle I’ve assumed currently).

Since “A” leg consumed about 14-15 months since Jan’08, the entire Triangle, consisting of five
legs, could consume 3 to 5 years, beginning ‘2008. 

Whether the move post-Jan;08 develops as a Triangle or Diametric, our trading/investment

strategies should be designed accordingly over the next 2-3 years.

The suspected 3 to 5-year Triangle OR 10-year-long Diametric on Sensex would be the 2nd
wave within the larger 5th wave. This 5th wave could be forming as a Terminal. Terminal
confirms when the Sensex drops below the 2-4 line of one higher degree. One may see the last
chart of this Report (Yearly chart), which shows the 2-4 line and its values for the next three
years.

Remember, Terminal development usually violates the 2-4 line, and Triangle in the 2nd wave
position is allowed only inside a Terminal Impulse (and not in a normal impulse).

The yearly channel, which I 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 the larger corrective phase as per 8-year cycle.

The current rally appears stalling near the breakdown level at 17200.
Alternative scenarios for Sensex

As far as larger wave scenario is concerned, I have been explaining 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, the breakout from which has already happened. This has been my
preferred scenario for many years. 

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.
The forecast was achieved.

As per the alternative scenario, a Diametric developed into the 1 st of the 5th leg. In this
alternative, the 4th wave ended at May'2003 low near 2904. [The 5th leg, being a non-extended
wave of the Impulse, should not have gone much beyond 61.8% ratio to the 3 rd, which projected a
maximum of 13300. In this argument, the 5th wave was assumed to be the "non-extended" leg
within the 3rd which began at 259 in Nov'1984 as shown below]. 

The 3rd (of the 3rd) was shown to be the extended leg, which achieved exactly 261.8% ratio to the
1st on log scale. The 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. 

However, the Sensex sustaining well above 13300, may lead to a "Double Extension" scenario,
wherein both 3rd as well as 5th would be extended waves.
Diametric formation has 7 legs, 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, thereafter.  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" would be equal to "a", both showing about 115% gain.
 . 

This Diametric development from 2003 to 2008 could be taken as the 1st of the 5 th, which, due to
corrective structure in 1st leg, could be developing as a Terminal. We may be into its 2nd wave,
since ‘2008, which, could be forming as a Triangle.

The "Double Extension" scenario was also shown on ASA Adjusted Long-term Index chart. I've
created this chart combining Index figures compiled by a British advisor (from '1938 to '1945),
RBI Index figures ('1945 to '1969), F.E Index ('1969 to '1980) and Sensex (thereafter till date).

The chart shows the Super-Cycle-Degree count that I had been presenting since many years
ago. The labeling shows that the market is into the 5th of the SC-degree 3rd wave. This 5th leg
(within SC degree 3rd) may have begun either from 2904 (May'2003) or from 7656 (Oct'05). If a
"Double Extension" unfolds, Sensex could be projected to achieve even 50000+. Break of 2-4
line, however, would confirm the Terminal development inside the 5 th, and would therefore,
restrict the upsides to much lower levels, though higher than 21206. 

If 5th proves to be a Terminal, the larger label of 3 rd will have to change to 5 th, because only
a 5th of the 5th can be a Terminal. The 1st and 3rd shown, would then change to 3rd and 4th.