Last week I said, “Bias would continue to be negative until 20K is taken out … below 19800 could test 19350-400, the line joining previous two lows of ‘May and ‘Aug shown on the Daily chart … Not respecting this line, would open downsides of 18850-900, which is the breakout level of the previous year-long channel.”
Monday was a positive day. Up a smart 400, Sensex touched 19989. The high, however, failed to take out our required level of 20K. The failure, therefore, resulted in sell-off beginning Tuesday. By Friday, Index came down by over 1000 points, touching 18955, a level very close to our targeted downside of 18850-900.
While Sensex lost 2.3%, Realty Index took most of the beating, and was down by more than 13%. Small investors suffered as Small-cap Index came down by over 7%. Except for IT Index, all others ended with losses. Some of the stocks had a major breakdown, down more than 10% for the week.
The action for the week formed a 3rd consecutive Bear candle in a row, which, however, is now testing our downside target area mentioned as 18850-900.
While 18850-900 is the technical support area, the bias would remain negative until Sensex not only trades smartly above a morning session, but also moves above previous day’s high with strength.
At Friday’s low of 18955, Sensex had shaved off 2150 points from the Moorat Session high of 21109. A drop of 2000-400 has been a normal phenomenon during the last 20 months of rally. All the drops from previous tops, like 15600, 17493, 17790, and 18048 measured 2000-400 points.
We, accordingly, had targeted 18850-900 levels on downside. Now that the normal cut has been seen, we would watch for supportive activity near these lows. This area also corrects the previous rally from 31st Aug by 61.8%, and lies on the upper end of the previous year-long sideways channeled activity.
As I said, at least some strength above morning session will be required as a signal of strength. This, followed by strength above previous day’s high could built a recovery scenario.
After 14 days of channeled fall, the short term technical position is reaching oversold zone. Not respecting the 18850-900, may open downsides closer to 200-day EMA at about 18400-500 or 31st Aug low near 17800.
As I pointed out previously, a channeled fall indicates Complex Corrective move involving “x” wave. Structurally, some modifications were required inside the channeled activity. Sensex is forming “c” of the 2nd corrective.
We are structurally assuming the development since ‘Oct high of 20855, as F leg of the larger 21-month Diametric beginning Mar’09.
Our argument has been that Sensex would turn volatile before the actual top is made, and compared such development similar to what happened during Oct’07 to Jan’08.
Once the F leg is completed, we could see the last, G leg, to move higher and complete by Dec’10 (which is the 21st month from Mar’09).
Our argument is that top can build over a 2-3 month period, within which, sell-offs could give feeling that top is already in. As the players give up their bullish hopes, the market could reverse.
[Technical readings carried forward from previous weeks are shown in italics. Readers can easily identify the new arguments given in regular font]
Comparison with Jan'08 top formation
We can compare the current phase to the period from Oct’07 to Jan’08, a 2.5 month period just before the high of 21206 was hit by Sensex. This was also an extremely volatile period of nearly two months, just before the market actually topped.
The following chart of that period shows two equidistant parallel channels. The Sensex broke the original channel and achieved an equidistant height at the upper parallel.
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 Oct’07, before it finally topped on 8th Jan’08.
A similarity has been drawn for the current phase to the development above, as Sensex is again closer to its previous highs.
Structurally, if we assume E leg is ending at the upper channel showing equality of E with C, then F can drop lower to test the middle line of the parallels, as if did during Oct’07 to Jan’08 period.
Once the support at the middle line is held by the F leg, we may expect G to move higher to the uppermost parallel, preferably targeting 22700 (our next Grid level), sometime in Nov-Dec’10.
Nov’10 will be 34th month from Jan’08 top, and Dec’10 will be 21st month of rally from Mar’09 bottom.
Previous technical arguments
Previously, I also compared the Sensex development with the development in Dow chart during ‘2003-07 as shown below.
It was also observed, that 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 being formed at the Grid levels.
After having our target near Grid of 20250, Sensex is now trading above it. A decisive move sustaining above 20250 can open the next Grid level of 22700.
Despite that possibility, the larger label for the rally since Mar’09 will be maintained as a corrective B leg. That is because this rally is slower compared to previous fall (A leg). Against the 14-month period consumed by the fall (A), this rally (B) has consumed 20 months.
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” means 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.
I explained the 14-month fall as the “A” leg of large multi-year consolidation. The corrective phase beginning Mar’09 retraced about 80% of the previous 14-month fall from 21206 (Jan’09) to 8867 (Mar’09), which was earlier labeled as a Triple Combination. The longer time required while rallying is symptomatic of its corrective label.
The rally from 8047 (actually beginning at 8867) was 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 if we see 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 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 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 my Super-Cycle Degree count, shown on ASA Long-Term chart under Appendix, I have, in fact, 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.
In the previous 8-year cycle top during ‘1992-93, 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.
I had, accordingly, targeted sub-10k levels for Sensex price-wise, 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 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 following this 8-year cycle.
On Balance Volume (OBV)
On Balance Volume (OBV) adds up accumulates each day’s volumes as positive or negative, depending on day’s close. On a broader scale, it has been creating higher top and higher bottom, just like the price chart itself.
After last week’s sell-off, OBV now appears crucially poised near the Green line which proved support previously.
Appendix : Alternative 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 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 its 5th Wave, and the same is likely to develop as a ”Terminal”, because its lower-degree 1st wave since May’03 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 May’03 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.
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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.
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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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