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Last week I argued, "A strong follow-up above Friday could open upsides for retesting the 50% and 61.8% levels once again, which proved a strong resistance last week. Only a further strength above 50%-61.8% marks would establish a bullish Double Bottom like situation at current lows … A total failure to strengthen above 50%-61.8% area could even force us to shift us to end the F at 'Nov lows, and failed attempt at 60-61.8% area as G-Failure … Sensex needs to push above 61.8% at about 20300 to open a normal G leg …"
Sensex strengthened above Friday's Piercing Line candle on the very first day of the week. Gaining further on the remaining three days of the truncated week, it ended with a weekly gain of 356 points or 1.8%. IT and Metal Indexes outperformed with 5% and 4% gain, respectively.
Bulls also managed to form a Bull candle for the week. The high-low of the Weekly candle, however, remained inside previous week's high-low range. That leaves the weekly picture still indecisive.
Thursday was the last day of the Week. The low of that day, at about 19500-30, retraced 61.8% of last week's gains. Levels of 19500, therefore, may be considered crucial on downside.
On the upside, 19900 (upper end of the falling channel) and 20000-300 (50% and 61.8% retracement level to 'Nov fall) remain crucial as discussed previously.
Indeed, the 14-day fall of 'Nov (from 21109 to 18955) has been retraced by only about 50-61.8% in the next 14 days. This can be bearish structurally. We may, however, continue to assume the development since 'Oct high of 20855 to be the F leg formation, which would allow the G leg developing upwards, either as a "normal" leg or a "failure" leg.
The justification for keeping the possibility of G leg development is based upon the fact that the F leg measured as a normal cut of 2000-400 points.
As I reasoned earlier, the 21-month rally from Mar'09 had four major cuts, all measuring 2000-400 points. The F has also been a "normal" cut so far, as would remain so until Sensex drops below 18600-700. It may also be noted that many negative news-flow got absorbed at Nov-Dec lows.
Also, at the current lows of Nov-Dec near 18800-900, F corrects exactly 61.8% of E. Only a drop below 18600-700 would take it into the realms of abnormality.
Sell-off below 18600-700, therefore, would indicate a stronger bear pressure on the market than before.
The intra-day chart of last five days, from the low of 19075, shows formation of higher bottoms and higher tops, which can be tentatively assumed as a-b-c-d. This, however, has not generated a faster upside retracement, indicating an unfinished "e" of F.
With small b, and overlapping of d with b, the development appears as a probable 7-legged Diametric. The e-f-g legs of this formation may be pending, and the same may form into a sideways action before resolving lower.
Alternatively, "e" of F finished at last Thursday's low, which could open the larger G upwards. This requires a strong follow-up beyond the falling channel in the initial part of the coming week, which can also take out the resistances at 50%-61.8% retracement levels in a fast upside action.
The 50%-61.8% levels, as can be seen on the charts, proved strong resistances a week earlier. Indeed, 20300 was explained as a crucial upside level, only above which, the rally from 'Nov low of 18955 turns bigger that the Moorat Session rally from 19769 to 21109. A move above 20300, accordingly, would confirm a G leg development, which would also establish a bullish Double Bottom like situation at Nov-Dec lows.
As argued previously, "A total failure to strengthen above 50%-61.8% area could even force us to shift us to end the F at 'Nov lows, and failed attempt at 60-61.8% area as G-Failure. Sensex, in other words, needs to push above 61.8% at about 20300 to open a normal G leg, which can test 21100 or even 22700 on upside."
Failure to move above 20300 would compare the recent development with that of Jan'Feb'08, when Sensex failed to correct more than 61.8% of its 8-day fall from 21206 to 15332. This failure had opened a bear phase lasting 14 months.
Not respecting 18600-700, may seek testing of 200-day EMA at about 18400-500 or 31st Aug low near 17800 as the next downside crucial levels.
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.
[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.
OBV is still holding the Green line, despite the high-volume sell-off during 'Nov. However, the Red line shown is the resistance on the upside.
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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