Weekly Technical Analysis 06 May 2013 - By Vivek Patil, India's foremost expert in Elliot Wave Analysis

Top Stories of the Week Sensex up 1.5%, falters near 80% retracement level on Rate-Cut day. RBI cuts Repo rate by 25 bps to 7.25%. Hindustan Unilever jumps 23% on buy-back at Rs.600. OMCs cut petrol price by Rs. 3, steepest cut in four years. SC asks CBI to explain political interference in Coal scam probe. Govt clears IKEA's Rs.10500 cr investment in single-brand retail. Manufacturing slips to 4-year low. ECB cuts interest rates to a new low. US jobless claims fall sharply to a 5-year low. Dow hits all-time high above 15K.

3-week rally now labeled as "b", testing crucial 80% retracement level to Jan-Apr fall [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, Index has maintained a higher low, and not made any lower low yet The stalling action confirms and bias turns -ve only when the action weakens and closes below any previous day from here Having achieved our projected levels, we may limit +ve plays to select stocks and sectors The week will finish off with RBI Policy on the last day of the week, rd i.e. on Friday the 3 May By the end of next week, we should get enough indications on the label to be applied to the current rally, either x-wave or b wave. Though our preferred choice has been an x-wave, we let the market decide In the truncated week (Wednesday was a holiday), Sensex moved higher till Thursday, maintaining higher high-low on each day. On Friday, when RBI announced a 25 bps rate-cut, it failed to make a Higher High, though it maintained a Higher Low even on that day. At the end, Sensex finished with a net gain of 289 pts or 1.5%. The FMCG Index (thanks to 23% jump in HLL) rose 7.5%, and beaten down IT Index recovered 4.7%. Bank Index, on the other hand, cooled down by 1.1%.

Sensex formed a Bear candle on the last day of the week, when RBI announced a 25 bps rate cut. As was pointed out, previously on th th 29 Jan and 19 Mar, when RBI cut the rates, market had dropped violently. Indeed, we argued that Sensex went up from Jun12 to Jan13 when RBI belied hopes of rate cut. Now that rate-cut cycle is on, one would expect market to move down. Watch if it does break into lower lows. During the week, however, Sensex crossed the 61.8% retracement level to the 3-month fall from Jan to Apr13. Structurally, therefore, the current rally would now be marked as b , instead of x-wave assumed earlier.

However, last weeks high of 19792 was an exact 80% retracement calculation to the 2060 -pt (Jan-Apr) fall from 20204 to 18144. Adding 80% of 2060 to 18144 calculates exactly to 19792, the high of last Thursday.

As we have seen from the previous history, it is generally useful to be cautious near any 80% retracement level. This point was highlighted with the help of the chart reproduced above. Previously, it was also discussed and shown on the following chart, that a rally retracing 80% could even prove to be a Bull trap, as it did after Nov10 top :

Though bias still remains +ve as long as the Daily chart maintains higher High-Low, bullish bets could also be in danger because or 11 consecutive Higher Lows on the Daily chart of Sensex. In the last 5 years since 2008, the maximum number of Higher Lows on the Daily chart of Sensex has been 12 , during 21 th Mar11 to 6 Apr11. However, Index later retraced the rally completely by the end of May11.
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After 11 Higher Lows last week, there could be one more. However, as matter of strategy, we may remain in day-trading mode, and watch if the market actually confirms a top by weakening/closing below previous candle. As explained, above 61.8% retracement level, the current rally is now marked as b, which is correcting the 3-month long a wave (which we marked earlier as a 7-legged Diamond-Shaped Diametric).

This assumes that the larger E from Jan13 is perhaps forming into a Flat, wherein a was a label-3 Corrective pattern (i.e. a Diametric). A Flat is a 3-3-5 structure, wherein b is able to retrace more than 61.8% of a , due to lack on Impulsive structure inside a. The current 3-week rally is marked as lower-degree a-leg inside b, which appears as a label-3 corrective pattern. If a-leg ends near 80% retracement level, the lower b-leg can retrace more than 61.8% of the a-leg. If a top confirms as feared, the reaction could either be marked as an x of a continuing a-leg of b OR b-leg of b. Overall, all the legs of b should together consume more time than a (which was almost a 3-month long affair). Though there nothing against b correcting more than 80% of a, due to past experience, discussed above, wed do well to watch around 80% retracement level.

However, if we do see the Index tiring out near the 80% mark, bullish bets could come under threat for the time being, especially after 11 Higher Lows and rate-cut announcement already in. If the Index does form a top near 80% mark, it could turn out to be a major top inside a 13 month long bear phase we marked as larger E, of which 10 months are still pending. Strength above the 80% mark, i.e. last weeks high, would either mean that b is good for more, OR the rally if actually a g wave of the alternate structure shown on the chart above. We have been considering the development since Jan13 as E or the 5 leg of the larger Diametric from 2008 onwards . We also suspected that E could develop over a period of 13 months. Structurally, E could develop either as a Flat or Complex Corrective involving x-wave. The near 3-month fall from 29 Jan to 15 Apr was analyzed as a 7-legged Diamond-Shaped Diametric. Each lower-degree wave inside this Diametric, i.e. a-b-c-d-e-f-g, consumed about 8 days each, and its total period was 52 days (about 8 days multiplied by 7 waves). The Diametric looks bulging in the middle, which provides it with a Diamond-like shape. Further, a-wave and g-wave of the Diametric were almost equal, price-wise as well as time-wise, like we argued.
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Under Wave Theory, the standard correctives are Zigzag, Flat and Triangle. Though not mentioned in Glenn Neelys Book Mastering Elliott, a 7-legged Diametric is also considered one complete label-3 corrective. A Diametric is a very tradable pattern once identified correctly , like we did since Feb13 onwards. Its identification symptoms included time-similarity amidst its internal legs, and corrective (label-3) a-wave followed by sub-normal b-wave. Since Diametric is absent from the book, many seem to ignore its existence. It is basically made-up of two Triangles. While Contracting Triangle followed by Expanding Triangle would shape-up as Bow-Tie Diametric, Expanding Triangle followed by Contracting Triangle would shape-up as Diamond-Shaped Diametric. On one higher degree, the Diametric from Jan13, which completed last Monday, could either be the 1 Corrective or a wave inside the larger E. If the Diametric is a wave, then the current rally is part of b. However, if the Diametric is the 1 Corrective, then the current rally is an x-wave. Implications for the rally would be different in these two alternatives. If the current rally is b of E, then it would retrace more than 61.8% of a, and also consume more time than a. Howeve r, st if the current rally is only an x-wave, it would be a short affair time-wise, and cannot retrace more than 61.8% of the 1 corrective. The 48-day rally from 20 Nov12 was completely retraced exactly in 48 days. This amounts to faster retracement of Impulse th we had assumed inside the 5 of c inside the larger D. This can be considered as confirm ation of the larger bearish assumptions we discussed from time to time since Jan13 top .
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The action has also broken below the 200-day Exponential (EMA) as well as Simple (SMA) Moving Averages, and indeed closed below them for the first time since Jul12. Decisive break of 200-day MA levels is generally considered by many as existence of a Bear phase. Indeed, 200-day MA break is a major, and perhaps the only technical parameter, understood by people who generally follow Fundamentals otherwise. For the followers of Technical Analysis, however, such 200-day signaling a Bear phase comes too late. With the help of Technical Analysis, remember, we were able to pin-point that a major top would be made during Jan13, below 20303, and Sensex obliged.

Multi-Year long Diametric Formation It was argued that all multi-fold rallies would be followed by multi-year long consolidations. Sensex, remember, rose 11-fold during 1988 to 1992, but entered a 11-year consolidation thereafter. Again, during 2003 to 2008 it multiplied 7 times. Drawing similarity, it could a 7-year consolidation starting 2008. Further, the consolidation, may shape up like a 7-legged Diametric, similar to the consolidation seen from 1992 to 2003. The Diametric formation from 2008 is also suspected because each of its internal legs, except B, have consumed about 13 months

so far. So, the E wave from Jan13 could also continue for about 13 months, and end somewhere around Feb -Mar14.

This long-term picture was fist published on 6 Feb2012, with both D legs highlighted in Purple color rectangles. In the previous instance, the D leg during 1996-97 had retraced as much as 97% of its preceding C leg. In the current instance, D retraced 84% of C. Long-term corrective phase on Dows chart also appears to be a probable 7-legged Diametric. Instead of Bow-Tie Diametric on Sensex, Dows Diametric is shaping up as Diamond-Shaped Diametric.

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Jan-Mar Topping Cycle During Dec12, it was pointed out that major tops occurred during Jan-Mar period in the last 13 years. More than half the times, the top also occurred during the month of January . Based on this, it was argued that Sensex could hit a major top during Jan13, and it did.

This cycle may be the result of NAV pop-up exercise in the last month of the Calendar Year. Jan13 was the 7 such top forming in the month of Jan.

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Performance of the Broader Market The broader market has, generally, under-performed the main Index since the year 2008, as can be checked on the chart below.

Indeed, the broader Mid-Cap and Small-Cap Indices have also broken 0-b lines of the upward D leg, shown in White on the chart. The Small-cap Index even broke its Jun12 levels marked in Blue, i.e. gave a faster retracement to the c part of post-Dec11 rally. While the Sensex itself retraced 84% of it preceding 13-month fall from Nov10 to Dec11, BSE Small-Cap Index retraced only 38.2%, and has, in fact, reacted heavily from this retracement level. The divergence between Sensex and broader market appears to be Index management activity, as the Sensex is held by the Index heavy-weights, while the broader shows distribution. This whole thing, however, made for a tricky and uncomfortable trading environment.

NEoWave Discussions Inside the D leg from Dec11 to Jan13, we had had assumed a 3-legged a-b-c Flat. The c part was a 5-legged Impulse, inside which, th 5 leg (beginning Nov12) was assumed to be a Terminal. Based on NEoWave requirements, it was argued that Sensex would drop below Nov12 lows in 50% time of the 48 -day long Terminal. Index eventually did drop below Nov12, but took 48 day or 100% time (instead of 50%). As an abundant precaution, therefore, following alternate wave-structure was suggested for the D leg from Dec11, according to which, D is still developing as a 7-legged Bow-Tie Diametric. This structure, however, turns valid only if Jan13 highs are broken, not otherwise.

In the alternate scenario, c ended at Oct12 high, and it was equal to a leg. The d was the smallest segment, and e (i.e. post-Nov12 rally) was a Double Combination which ended in Jan13. The channel enclosing the a-b-c Flat inside the larger D leg from Dec2011 onwards was show n on the chart below. The 80% retracement level was considered and marked as a pattern implication for the 13-month long Double Combination move marked as C. Pattern implications, however, cannot be strictly implemented for the legs of Triangle and Diametric, which are exceptions to the general rules.

Inside c of D (beginning Jun12) for Sensex, we were expecting a 5-legged Impulse, because Flat is a 3-3-5 structure. As per NEoWave Extension rule, one of the directional leg inside an Impulse should get extended, i.e. achieve 161.8% ratio to the next largest leg. Since 1 and 3 were normal, we could have projected 5 wave Extension. However, such a move would project values slightly above the Nov10 highs, which would jeopardize the larger assumption of Bow -Tie shaped Diametric from 2008 onwards. We, therefore, preferred 5 of c not to achieve 161.8% ratio, but terminate below Nov10 highs, from where a downward E
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would open. Since E begins the expanding phase of the Bow-Tie Diametric, it would break below Dec11 lows. The 1 and 3 inside c of D continued for about 4-5 weeks each. We expected 5 to consume a similar time, and end somewhere in the month of Dec12 or near to it. As the beginning part of 5 shows violence on upside, we suspected 5 could develop internally as a 1 Extension Impulse or Terminal. Since a Terminal always occurs at major turning point, it would be able to generate the necessary downside power for the larger E leg. NEoWave, remember, allows exceptions to rules at important market turning points or under unusual conditions, like end of larger patterns or last wave, such as a Terminal. Also, Triangles and Terminals are exceptions to virtually all rules. Since Diametric pattern is made up of Triangles, NEoWave Exception Rule is also applicable to these patterns. Since we were at an important turning point in Jan13, and dealing with Terminal and legs of Diametric, perhaps pattern implication rules could not be satisfied to the full extent.
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Does it really matter whether the Sensex achieves the pattern implication accurately within the time-price parameters, when the general direction of the secular market has been largely -ve as we suspected since Dec12 ? As we argued, the larger bear phase is already visible in the broader market. Since Dec12 we turned cautious as the rallies were getting smaller (shaping into a Terminal), and also because of the Jan topping cycle (discussed separately). Sensex, consumed 59 weeks to retrace 84% of its preceding 13-month fall, which also was a 59-week affair, as shown on the chart below :

The rally, accordingly, was considered slower, corrective structure as per NEoWave, and not as part of any fresh rally. As per NEoWave, most channeled moves enclose a Complex Corrective structure involving x wave. Complex Corrective involving 2 correctives, joined by one x wave, is called a Double Combination, and carries a pattern implication of not more than about 80%. Further, as depicted on the chart below, since Nov10, it has been generally useful to consider 61.8% to 80% retracement area as crucial for terminating moves.

The post-Nov12 rally is now retraced by 100% on Sensex, but more than 100% on broader indices. The larger picture of Diametric from 2008 onwards is, therefore, considered still valid. That would mean 13-month long D-leg has ended at Jan13 highs, and 13-month long E-leg started thereafter. Only a move above Nov10 / Jan08 highs can make the larger picture invalid. Please see the monthly chart of Sensex showing the larger Diametric from 2008.

BSE Dollex-30 Index Meanwhile, since the FII activity turned a prominent factor in the Indian stock market, we examined the development of BSE Dollex-30 Index, which showed a Head & Shoulders formation around Oct12 on its Daily chart. Its downsides later achieved the Head-to-Neckline projection on downside, as we expected. Since the projection level also matched with its 200-day EMA, we suspected some pull-back to the Neckline. As can be seen on the Dollex-30 chart below, the Index recovered back to its Neckline level for the 2 reacted from heavily from the Neckline.
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time, but has now

The Index protected its Nov12 lows, and bounced back to break the Red falling resistance line, and is now testing 80% retracement level to Jan-Apr fall, just like Sensex.

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 20 Aug11. Sensex responded by hitting th the bottom on 26 Aug. This cycle had also raised the possibility of an upward/sideways phase that could survive for 32 weeks from Aug11, and end th st either 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. 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.

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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 th 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.

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. Index had broken above the 17800 grid level, was testing the next Grid level at 20250. It has now reacted lower almost exactly from this Grid level.

The larger picture 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 be nd 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 suspected to st 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. 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.
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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 : Super-Cycle-degree Wave-scenarios for Sensex For Super-Cycle-Degree wave-scenario, consider following ASA Long-Term Index. This Index has been created by combining a very old Index compiled by a British advisor (from '1938 to '1945), with RBI Index ('1945 to '1969), F.E Index ('1969 to '1980) and Sensex (thereafter till date).

The wave-count presented shows that the market is into the lower-degree 5th of the SC-degree 3 or 5 wave. The detailed wave-count from 1984 onwards can be seen on the Monthly chart given below. The 2 -4 line shown on the ASA long-term rd th Chart above, and Monthly chart below, would determine if the post 1984 Impulse is a Super-cycle-degree 3 or 5 .

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Super-Cycle-Degree 3 (or 5 ) began since Nov84. Its internal 3 was an extended leg, which achieved exactly 261.8% ratio to the 1 th st on log scale. The Sensex is now forming the 5 Wave, and the same could develop as a Terminal, because its lower -degree 1 wave from May03 onwards developed as a Diametric (which is 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.
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While the 4 is shown as a 3-legged a-b-c Flat on the monthly chart above. Alternatively, the 4 is shown as a 7-legged a-b-c-d-e-f-g Bow-Tie Diametric on the Monthly chart below. The chart below also shows 11-year parallel channel from Apr'1992 to May'2003. As shown, if one projects the width of this channel on upper side, such a projection gave 20000 as the minimum target. This fo recast was achieved.

. As mentioned above, the lower-degree 1 from May2003 to Jan2008 appears to be a Bow-Tie Diametric, 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 is considered to be the 1st wave of the Impuse. Due to the corrective structure in the 1 th leg, the higher-degree 5 could be developing as a Terminal. Since 2008, we are into its 2nd wave, which could conti nue to develop over a period of 7-8 years beginning 2008.
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As per NEoWave, break of 2-4 line confirms a Terminal development, and If the 5 proves to be a Terminal, the Super-Cycle-degree rd th th rd th th label of 3 will have to change to 5 , because only a 5 of a 3 cannot be a Terminal. Only a 5 of the 5 can be a Terminal. The Superst nd rd th Cycle-Degree marking for 1 and 2 as shown on ASA long-term chart, would then change to 3 and 4 respectively.

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