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Weekly Technical Analysis
- By Vivek Patil, India's foremost expert in Elliot Wave Analysis
Top Stories of the Week
Sensex attempts to protect '2011 low of 15136, gains 2.5%.
Govt allows foreign individual investors, pension funds to invest directly in equities.
Falling Rupee and fall in equities cause an estimated hit of Rs.2 lakh cr to FIIs.
Govt plans bank a/c number portability.
Purchasing managers' survey shows manufacturing bouncing to 6-month high.
Imports surge 24.6% and exports up 3.87% confirm worries on trade deficit.
Anna Hazare holds back his threat to campaign against Congress.
Inflation drops into negative zone, down by 3.36%.
Sensex attempts to hold '2011 low - Watch 3-week long "Contraction"
Last week we discussed, “end of E as a Complex Corrective would eventually lead to an
upward F, opening of which we can confirm only when a falling segment gets retraced
in a ‘faster’ time … Yearly lows are important levels … Last year, Sensex came close to
‘2010 low of 15652 during Aug’11, and protected it for nearly 3 months till Nov’end … Now
that Sensex is close to ‘2011 low of 15136, we’ll watch if any attempt is made to protect
it … All in all, we simply consider 15136 as crucial downside in the immediate future …”
Down 97 initially on Monday, Sensex hit 15358. However, campaign to protect ‘2011 low
was taken up immediately thereafter. Rallying a hefty 647 points over the week, Index
finished 394 points or 2.5% higher. The action included gap-up move on Tuesday, which
was retested amidst huge volatility on Friday. The recovery attempt, however, failed to
retrace the last falling segment in faster time.Cap. Goods, PSU and Bank Indexes
outperformed with 6%+ gains.
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The Sensex formed a Hammer on the very first day, indicating supportive efforts to protect
‘2011 low of 15136. Hammer received a positive follow-up with a gap-up action on
For the time being, Tuesday’s gap-up area at 15641-543 and last week’s low of 15358 can
be considered crucial technical levels on downside. Holding these downsides could
convert the larger E leg into what is called an “Extracting Triangle”.
Extracting Triangle is a 5-legged pattern showing smaller falling segments (e < c < a)
and bigger rising segments (d > b). We still require a faster retracement of “e” leg to confirm
this Extracting Triangle from wherever it ends.
In other words, swift and sustainable move above 16049 could confirm that E ended as
an Extracting Triangle, and F leg is moving higher.
Under NEoWave logics, “Faster retracement” indicates directional change. Thus, a down-
move should usually end with faster retracement of the last falling segment.
After a gap-up move initially during the week, market went into a volatile action between
Tuesday's gap-up area and previous high of 16049. As a result, despite the strong rally during
the week, Index failed to take out its previous high of 16049.
Indeed, Sensex has failed to retrace any of its falling segment since Dec’11. This resulted
in Index hitting lower tops on each rally, 16133 on 14th Dec, 16069 on 16th Dec, and 16049
on 27th Dec.
As against this, it has made higher bottoms since 20th Dec. After 15135 on 20th Dec, it
made a higher bottom on 2nd Jan at 15135. All this has created some sort of “Contracting”
environment over the last three weeks.
Under an indecisive, “Contracting” environment, we’ll have to keep the bearish
alternative open, until the positive confirmations are in place. As shown on the charts, this
alternative suggests D leg may be developing since Nov’11 bottom of 15479 as an
Irregular C-Failure Flat.
Thus, the current contracting development is either ending part of E leg or Terminal
development inside “c” of D.
Any move bigger than the preceding leg, i.e. a segment larger than 700, would indicate
break from “Contraction”, and confirm help us chose from the alternative structures.
We have seen a lower top lower bottom market since Nov’10, which each rally correcting not
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more than 75% to 80% of each successive fall. This has created a year-long falling channel
as we have seen on the following chart.
Structurally, the fall from Nov’10, which has been a channeled affair so far, can be, as all
channeled correctives can, be labeled as a Complex Corrective. The first corrective was
assumed as a Neutral Triangle from Nov’10 to Jun’11.
Post-X in July (19132), the second corrective is tentatively assumed as a Diametric as
none of its legs was an Impulse.
At current lows, the 2nd corrective has achieved price-equality with the 1st corrective,
another reason why ‘2011 low of 15136 could be crucial.
In case the Sensex weakens even below the channel, the situation can take a turn for the
worse, like Oct’08. In such a case, we cannot rule out testing of the gap-up area of ‘2009 at
On one higher degree, since the C leg from Nov’10 does not appear not as an Impulse so
far. As argued before, it could be part of the larger Triangle or Diametric developing from
If so, even if the Sensex breaks the 1-year long channel after some time, such a break could
only be a D leg of the larger Triangle or Diametric, a temporary rally of one higher degree.
Sensex has broken ‘2010 low of 15652, and now in ‘2012 is found testing the ‘2011 low
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. 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.
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The chart given below shows equidistant parallel lines enclosing the development since
Nov’10. Further, it shows how Sensex respected most of its important lows as
This chart shows the possible upsides could be limited to 17300 to 17800. Sensex recently
achieved 17800 and reacted lower.
The 17800 area was the crucial as per our 2450-point Grid chart, discussed elsewhere in
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[Technical readings carried forward from previous weeks are shown in italics. Readers can
easily identify the new arguments given in regular font]
Is larger B from Mar'09 still on ?
The development since Mar’09 shows smaller rallies and bigger drops, and the same
has followed a 32-week time cycle, as shown on the chart below.
This had raised a possibility that an important low may be formed around 20th Aug.
Sensex responded by hitting the bottom on 26th Aug, and despite its marginal break,
more or less holding it for 16 weeks thereafter.
This raised the possibility of an upward/sideways phase that could survive for 32
weeks, and end either on 4th Feb’12 or 31st Mar’12, developing as a ranged movement
like the Left Shoulder shown on the chart, perhaps as Triangle or Diametric.
Going by the structural possibilities from this, Sensex could be forming an “e” leg of a
possible Extracting Triangle, which would remain smaller than the “c” leg.
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 Mar’09) would make up the larger B leg
from Mar’09 lows of 8047, which is correcting the 14-month long A leg from Jan’08 to
Time-wise, this B leg ending Feb-Mar’12 would consume as much as 261.8% time
compared to A, before C leg of the equivalent degree goes down.
This study shows the possibility that the real C leg of drastic fall could begin only next
year. We’ll keep our fingers crossed on such a possibility.
Recently, the Right Shoulder achieved the heights similar to the Left Shoulder.
If the Right Shoulder development turns similar to the Left Shoulder, we may see a
sideways market ranging between 15500 and 18000 for as much as 32 weeks beginning
However, further weakness from here could endanger this contention, and would mean
Right Shoulder remained a smaller affair, time-wise, as compared to the Left Shoulder.
In a Head & Shoulder formation, it is not uncommon for the Right Shoulder to consume
lesser time than the Left Shoulder as the market may be in a hurry to open downsides.
Further, the development inside the Right Shoulder itself looks like a Head & shoulder
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We earlier assumed a Running Expanding Triangle developing since Nov’10. This
assumption was later modified in favor of a Neutral Triangle from Nov’10 to Jun’11.
In the larger picture, the current phase has been assumed as C wave of an A-B-C formation
from ‘2008. Since A was a 14-month affair and B consumed 20 months, the C could take 12 to
18 months to complete.
As a result, the Expanding Triangle OR Neutral Triangle, whatever may be the case, was
argued to be only the 1st corrective inside a the larger C, which could develop itself into a
Double Combination, similar to what S&P-500 Index did during ‘2000-‘2003.
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However, C of a Flat has to be an “Impulse”. Since we are labeling the larger C leg from
Nov’10 onwards as a Complex Corrective, it can only be part of a larger Triangle or
Diametric developing from ‘2008.
This raises the possibility of post-2008 development getting compared to ‘1992-‘2003
period, when Sensex moved sideways for 11 years, looking similar to a Diametric
All major tops are characterized by 30% drop from the top value. This is not only normal
when a bear phase starts, but is seen inside a bull market too (as we saw during ‘2004
and ‘2006). 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 15766, measures 5343 points, which is
only about 25% cut so far. However, on BSE Small-Cap and MidCap Index, the loss from
‘2010 high does measure 30% or more.
Overall, it was argued much earlier, that we would see a topping formation spread over
2-3 month period beginning ‘Oct. This played out well as suspected. Indeed, as was
observed, 60% of stocks topped out during ‘Oct’10 itself, and many have already
shaved off much more than 30%. Sensex itself has now shaved off 28%.
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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 out.
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
before reacting lower.
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
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A similarity can be drawn for the ‘2010 top formation with the developments of ‘2008, as
Sensex is currently seen hovering around the lower parallel.
Previous technical arguments
We may also compare the Sensex development from Mar’09 onwards with the Diametric
formation on Dow chart, which developed during ‘2003-07, as shown below.
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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.
Recently, heavy damage has occurred almost exactly from the Grid level at 17800. The next Grid level
is around 15300, which is now under test.
Our markets, remember, has seen multifold rallies previously, each time continuing for
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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 (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.
We explained the 14-month fall from Jan’08 as the “A” leg of large multi-year
consolidation. The corrective phase beginning Mar’09 retraced about 80% of the
previous fall from 21206 (Jan’09) to 8867 (Mar’09), (which was labeled as a Triple
Combination). The longer time required while rallying is symptomatic of its corrective
The rally from 8047 (actually beginning at 8867) was, therefore, 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 is suspected to 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.
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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. 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 :
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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 :
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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.
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.
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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
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.
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.