A weekly analysis of the Indian stock markets

24 May 2010
By Nirav Vakharia
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Markets Plunge

Markets plunged across the globe on fears that European Debt crisis would restrict the economic recovery.

Monday saw the BSE Sensex breaking previous week low but soon managed to recover most of the
losses. But as global cues kept worsening, the Sensex plunged through rest of the week on heavy selling
pressure to touch a three month low of 16187.

As short covering appeared near the strong of 200 EMA, the Sensex managed to bounce back from the
[C]ending
intra day lows but still Daily the week with 549 points at 16445.

* BSE - SENSEX
C
180
(b)

(x)
175

(a)

170

(c)
165

(a)
160
A

B 155
x100
22 2 8 15 22 29 5 12 19 26 3 10 17 24 31 7
March April May June

Short Term

In just six trading days, the Sensex shed almost 1200 points to briefly break below 200 EMA to touch a low
of 16187 on Friday. This is for the first time since April’09, that the Sensex has gone down below its 200
EMA.

The six day action saw the index forming a larger drop of 1202 points against 1142 points seen from
17826-11684 in the third leg (c) of the previous combination.

For the past two days, the index managed to close above their opening levels, hence a further close above
16500 would confirm the end of first leg (a) of the second combination.

Above 16500, the second minor leg (b) would open up which faces immediate resistance at 16800 level.
Above 16800, it is expected to test the 61.8% retracement level of last drop at 16930 near the upper
channel line.

On the lower side, the 200 EMA at 16380 is the strong support.

The two previous minor recoveries inside the channel had lasted 4-5 days, hence it seems that the
expected retracement should be completed over next 4-5 days.
 Intermediate Trend

* B S E - S E N S E X Weekly [C]
a c
c 180

165
B a
[A]
A
b
x 150
b

135
[B]

A 120

[X]
105

90

[Z] 75
C [Y] x100

Nov Dec 2009 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2010 Feb Mar Apr May Jun Jul

As expected, the index fell further to test the 200 EMA for the first time in over a year, forming the first leg
(a) of the second combination inside the current downward sloping channel.

On the lower side, the index may test the lower weekly channel lines at 16000 over next couple of weeks.
The entire fall from the top of 18047 forms the first leg A.

From the lower channel line support, the index is likely to bounce back forming the second retracing leg B
which could retrace at least 50-61.8% of A.

A break below the lower channel line which stands at 16000 for the current month will play a decisive role
in the future movement of the Sensex.

Since past many months, the index is trading inside a flat range forming an almost flat channel on the
weekly charts.

It has been noticed that whenever, the index moves near the upper range, some negative news related to
financial crisis appears, be it Dubai, Greece or entire Europe. Similarly near the lower channel line, a
solution to the ongoing problem appeared twice earlier in Nov’09 and Feb’10.

Each of the subsequent rallies has remained smaller then the previous one and consuming lesser time. On
the contrary, the drops have become larger consuming larger time. The current fall has already consumed
6 weeks against 4 weeks in preceding drop. This confirms that the major cycle is turning bearish.

The index is once again approaching towards the lower channel line, but it seems that no remedy to the
ongoing problem is in sight. Major world indices like Dow Jones, FTSE, Hang Seng have already broken
below some crucial support levels while Shanghai have entered bearish markets.

Near the top, the entire second B leg took exactly 14 months equaling the time taken for A when the
index had fallen 13500 points in 2008. Price wise, it has retraced 77% of A.

Due to time and price confluence near the upper channel line, the second upward corrective leg of
the triangle has completed at 18047 and third leg might have started which would be confirmed
when the index decisively violates the lower channel line at 16000.
As all the 5 legs of a triangle tend to achieve time equality, it seems that the next leg C too could last at
least 14 months to complete a retracement of B.

Price wise, C could retrace up to the monthly gap range of 11621-11493 to retrace at least 61.8% of B.

* B S E - S E N S E X Monthly 225
21206
210
B
195
[C]
[X]
180

[A] 165
B
150
[W] [B]
135

A 120

[X] Gap 11621-11493

105
- - - - - - 14 Months - -- - - - -

- - - - - - 14 Months - - - -- - - 90

C [Z]
A 75
[Y]
x100
A S O N D 2007 A M J J A S O N D 2008 A M J J A S O N D 2009 A M J J A S O N D 2010 A M J J A S O N D 2011

And it’s ironical that the markets have started correcting downwards once again in the Month of May. It has
been noticed that major drops have occurred around the month of May. And this phenomenon is not
confined to Indian markets only, the world markets too are following the same cycle.

May Bottom Cycle

Corrective drops seen from the nearest peak every second year around the month of May.
2008: 29.4%
2006: 30%
2004: 29%
2002: 12.5%
2000: 38%
1998: 38%
1996: 9%
1994: 16.8%
1992: 35%

Long Term

Horizontal Channels: On the yearly charts, the Sensex had a breakout in 2004 above the trend line drawn
from previous two tops of 4546 and 6150 after which it touched the highs of 21206, achieving the projected
target of the width of the channel from the breakout point.

A new parallel line drawn at equidistance on the higher side provided the upper targets of 20000. Hitting
the levels in 2007, the Sensex touched a new high of 21206.

Reacting from the new overhead channel line, the index dropped down. Registering largest ever yearly
drops in its history, the Sensex dropped exactly to the middle channel line which it had broken earlier and
is a strong support zone. The trendline passes through 8600 in current year.

8 Year cycle Trend: Major events that have shaped India’s destiny have occurred with the gap of 7-8
years. (8 is a number from Fibonacci series.)
Chronology of Events:
1976 Emergency
1984 Congress under Late Rajiv Gandhi came to power with almost 2/3rd majority
1992 Harshad Mehta Scam
2000 Ketan Parekh Scam
2008 Global Financial Meltdown

The Sensex is following an eight year cycle trend. The break of the channel lines in 1992 saw the index
correcting over 53%. After eight years in 2000, the index once again fell into the grip of bearish cycle and
corrected over 57%.

In 2008, markets faced similar fate. Breaking the yearly channel, the index once again echoed the similar
trend and shed more than 63.7% of its weight from the top.

* B S E - S E N S E X Yearly
250
200
150
100

50

x100

1970 1990 2000 2010

As per the Rule of Alternation, the subsequent corrective patterns take different form. If the first one is a
simple, the second develops as a complex pattern.

From 1992-2000, the index formed a sideways corrective pattern inside two parallel lines. As per the above
Rule of Alternation, the current corrective could develop as a triangle pattern.

A triangle always consists of 5 waves where the last four waves retrace at least 50% of the previous wave.
Each of the retracing leg tend to achieve price and time equality with the previous one.

As such, the whole triangle could last several years and would trade inside the second and third channel
lines.

DISCLAIMER: The author Nirav Vakharia has taken due care and caution in compilation of data. The guidelines expressed
above are only the views of the author, and not a recommendation to buy or sell. Only those investors who are aware of the
risks inherent in securities trading should use this information. The author does not accept any liability whatsoever arising from
the use of any of the above guidelines or its contents.
The author does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any
errors or omissions or for the results obtained from the use of such information. The author especially states that he has no
financial liability whatsoever to any reader arising out the use of above information.
No part of the document shall be published, re-distributed without the prior permission of the author.
DISCLOSURE: The author may have outstanding positions in any or all of the securities mentioned herein.
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