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op Stor ies o f t he Week

Week ly Techn ica l Ana lys isSeptember 26,

- By Vivek Patil, India's foremost expert in Elliot Wave An

Sensex fails to take out 17300, reacts lower after 4 weeks.

Rupee declines to 2-year lows.

BSE Dollar Indices break 'Aug lows.

Dollar surge to affect dollar obligations of companies.

Gloomy US economy and slowing Chinese economy pressurize global indices.

Crude skids to 6-week lows on economic worries.

Govt reportedly printing more notes of higher denomination.

US President to propose "Buffet Tax" on Millionaires.

'Aug sees highest number of downgrades in six years.

IMF scales down India's growth forecast to 7.8% from 8.2%.

25% of top indian companies pay lower advance tax.

ensex re jec t Inverse H&S fo rmat ion - 15766 t o dec ide i f i t s " c " o r C o f la rger degree

ast week we discussed, “Tr iang les p rov ide a d i f f i cu l t env i ronment as the range cont rac ts g radua l ly , and

may no t be so sure un t i l the b reakout f rom the t r iang le occurs … a fas te r re t racement above 17300 w o

ook l i ke an Inverse H & S fo rmat ion … having hit a bottom as per 32-week cycle, we considered on ly l im i ted ups

f 17300-800 … Sensex has showed l owe r t op l owe r bo t t om , sym p tom a t i c o f a Bear m arke t , f o r t he l as t

months since Nov’10 … Further, f rom ‘Feb t o ‘ Jun11, Index w as ho ld ing 17300 leve ls … broken on 5 t h Aug

w i th a gap -down ac t i on , which remains uncovered fo r 1 .5 months thereafter … and have a lso reached very c l

o 17300 .”

ensex opened gap-down on Monday, and recovered to 17191 by Tuesday. However, failing to move above 17300, it saw a p

ell-off of 1139 pts by Friday. While Sensex los t 4 .5% on the net basis, Cap. Goods and Metal Indexes shaved o

%. The action formed the largest Weekly Bear candle in five weeks. Due t o the w eak Rupee, a l l Do l la r -based Ind

BSE Dol lex , e tc . ) b roke the i r respec t i ve ‘Aug low s .





ensex dropped with a huge gap-down ac t ion on Thursday a t 16833-17001 . Friday created a High Wave indic

olatility and indecision. On the Intra-day chart, the action looked like a corrective phase to the heavy fall, which corrected

bout 25% of intra-week loss.

riday’s high, at 16368, can also be seen against previous low of 16375, both being practically the same level. This level was

he low of previous week. Friday ’s ac t ion can , thus , be seen as tes t ing o f t he b roken leve l.

We may, accordingly, mark the 16368-75 as a c ruc ia l ups ide fo r the t ime be ing . Unt i l Index can s t rengt

bove 16368-75 , i t cou ld remain indec is ive o r even w eak . S t rength above 16368-75 can, on the o t her h

rea te some c or rec t i ve phase ins ide “c ” .

On the downside, Index is testing the low of the Bull candle of 29 th Aug. After hitting the low of 15766, Sensex had reverse

hat day with a gap-up action at 15892-16069. Friday’s low was 16052, exactly inside this area.

We may cons ider 15892-16069 as a poss ib le suppor t a rea near to w h ich “c ” leg o f Cont rac t ing Tr iangle

nd as a h igher bo t tom.

Weakness c ont inu ing be low th is a rea , fo l lowed by dec is ive b reak o f the p rev ious low o f 15766 w o

nforce the a l te rna t i ve labe ls marked in B lue.

hese a l te rna te labe ls ind ica te t ha t t he la rger A leg a lready f in i shed a t 16432 (on 9th Aug), which was fo l lo

y the B leg as I r regu lar Cont rac t ing Tr iang le .

s per this alternative, Sensex may already be into the C leg (of the larger 2 nd corrective phase. The 1st corrective, we ma

arlier, was a Neutral Triangle from Nov’10 to Jun’11. The ‘Jul rally was marked as X thereafter.

he a l te rna t i ve labe ls , how ever , con f i rm be low 15766.

ince the B leg i s seen as a p robab le I r regula r T r iang le f rom 9t h Aug onw ards , the C leg can ac h iev





much as 161.8% ra t io t o the la rgest leg o f “b ” (which was from 17247 to 15766).

n other words, i f t he Sensex g ives a dec is ive beak be low 15766, w e can see t he C leg reach ing tow a

4800.

ol la r -Rupee char t c lear l y shows a b reakout f rom t he 2nd cor rec t i ve Tr iang le o f a Doub le Combinat ionrom t he h ighs o f ‘2009 .

he cor rec t i ve phase re t rac ed about 61 .8% o f the p rev ious impu lse , The implication for a Double Combinatio

bout 80% at 50.50 level. Above 50.50, Dollar may even strengthen to a new all-time high.

he st rengt h in Dol lar as resul ted in BSE’s Dol lar Indexes based on Dol lar rate. Al l these indic es have bro

e low the i r respec t i ve ‘Aug low s .





The chart given below shows equidistant parallel lines enclosing the development since Nov’10. Further, it shows

Sensex respected most of its important lows as resistances later.

This chart also shows the possible upsides may be limited to 17300 to 17800, which are not only the previous lows, as mar

ut are also the values along the upper parallel line.





f the fall post-Jul is A leg of the 2 nd corrective, the B leg can consume 4 to 10 weeks testing 17300-800 area .

Note, the 4 week minimum period is now over.

Alternatively, the development since Mar’09 could be assumed as a large Extracting Triangle, which has followed the

week time cycle explained in the next para ..

Technical readings carried forward from previous weeks are shown in italics. Readers can easily identify the new arguments g

n regular font]

s 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 cy

s shown on the chart below.

h is had ra ised a poss ib i l i t y tha t an impor tan t low may be fo rmed around 20t h

Aug. Sensex respondedi t t i ng t he bo t t om on 26 t h Aug, and recover ing 1224 po in ts therea f te r .

h is now ra ises the poss ib i l i t y o f an up-move t ha t cou ld c onsume 32 w eeks , and end e i ther on 4 t h Fe

r 31 st Mar ’12 , w i th t he ranged movement l i k e the Le f t Shou lder shown on the c har t .

Going by t he s t ruc tu ra l poss ib i l i t i es fo rm th is , such as ac t ion cou ld be an E leg o f a poss ib le Ex t rac

r iangle , w h ich w ou ld remain smal le r than the C leg .

As we already know, Extracting Triangle is a pattern which shows smaller rallies and bigger drops. Thus in one direc

t 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, w

s correcting the 14-month long A leg from Jan’08 to Mar’09.

Time-wise, this B leg ending Feb-Mar’12 would consume as much as 261.8% time compared to A, before C leg of

quivalent 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 fin

rossed on such a possibility.

We earlier assumed a Running Expanding Triangle developing since Nov’10. This assumption was later modified in favor

Neutral Triangle from Nov’10 to Jun’11.

n 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-m

ffair and B consumed 20 months, the C could take 12 to 18 months to complete.

s a result, the Expanding Triangle OR Neutral Triangle, whatever may be the case, was argued to be only the

orrective inside a the larger C, which could develop itself into a Double Combination, similar to what S&P-500 Index did d

2000-‘2003.

Expanding Triangle is a rare formation as B of Flat, but can occur as the 1st corrective of a large Complex Corrective phase.

Most if its legs are spiky at end-point, which surprises players with “sudden reversal” . The middle portion of each

enerally shows consolidation . These characteristics are exactly reverse of what we would expect for a leg of “Contra

Triangle”.

The A leg of ET is violent, but usually retraces only about 38.2% of the previous move . In a downward running E

pwards maintains positive hopes of investors. The C leg, however, drops to about 61.8% level of the previous move,

surprising” investors.





The D leg, then, raises the hopes again, only to open a devastating E leg, which can achieve as much as 161.8% to 261

magnitude compared with its A leg.

The S&P chart above provides the exact pictorial description of what we have discussed about the formation here.

Further, during its development, expanding magnitudes indicate extreme levels of bull-bear fight, with both sides ge

surprised” by “sudden reversals”. Such a fight can go to an extreme extent. While Bulls feel Bears have no busines

e in the market, Bears feel exactly the reverse.

All major tops are characterized by 30% drop from the top value. This is not only normal when a bear phase starts, b

een inside a bull market too (as we saw during ‘2004 and ‘2006). The 30% taken out from the current top value

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 . How

n 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

This played out well as suspected. Indeed, as was observed, 60% of stocks topped out during ‘Oct’10 itself, and m

ave already shaved off much more than 30%.





Compar ison w i th Jan '08 top fo rmat ion

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 2

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

chieved 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 f

umber of sell-offs beginning Oct’07, before it finally topped on 8 th Jan’08.





similarity can be drawn for the ‘2010 top formation with the developments of ‘2008, as shown below.





rev ious techn ica l a rguments

We may also compare the Sensex development from Mar’09 onwards with the Diametric formation on Dow chart, w

developed during ‘2003-07, as shown below.





was also observed, that Sensex has been following a Grid of 2450-2500 points since ‘2008 . These Grids are shown on

Weekly chart of Sensex below. One can find a bottom or a top being formed at the Grid levels.





Our markets, remember, has seen multifold rallies previously, each time continuing for about 4 (four) years, after whic

sually enters a multi-year consolidation phase . In other words, “long-term” has always meant 4 years in Indian conte

Remember, Sensex rallied 11-fold from 390 (Mar’88) to 4546 (Apr’92) in four years, after which it consolidated for 11 y

rom ‘1992 to ‘2003.

n ‘2008, it completed another 4-year rally from ‘2003, during which Sensex rose 7-fold from 3000 levels to 21000. It

ow 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 p

eginning Mar’09 retraced about 80% of the previous fall from 21206 (Jan’09) to 8867 (Mar’09), (which was labeled as a T

Combination). The longer time required while rallying is symptomatic of its corrective label “B”.

The rally from 8047 (actually beginning at 8867) was, therefore, considered as the “B” leg. The next leg downwards w

e labeled as “C”. Such a-b-c development since Jan’08 would be considered part of the 2 nd wave of what appears

robable Terminal beginning ‘2003.

Even if we see the market reaching levels above Jan’08 highs, the multi-year consolidation is expected to shape up l

arge decade-long Diametric , looking similar to the consolidation we saw from ‘1992 to ‘2003. Our trading/investmtrategies should be designed accordingly.

The suspected corrective phase beginning Jan’08 would be the 2 nd wave within the larger 5 th wave. This 5 th wa

uspected 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, Term

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, '

was the beginning of 8-year long bull-run till '1992. In my Super-Cycle Degree count, shown on ASA Long-Term chart u

ppendix, 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

marked by stock market scams, because of which, the leaders of the rally had extremely difficult time later. For example, ACC

eading stock of '1992 bull market, remained below its highs till end of '2004. Similarly, the IT stocks, which were leaders of '2

ally, lost as much as 90% of their top valuations by the year '2003.

n the previous 8-year cycle top during ‘1992-93, Sensex lost 57% from 4546 to 1980 . In the next cycle top, the cut

lmost 58% from 6150 in ‘2000 to 2594 in ‘2001 .

had, accordingly, targeted sub-10k levels for Sensex price-wise, and a minimum of 13 months into bear phase time-

The price-time targets were achieved as Sensex dropped 63% from 21206 to 7697. The yearly channel, shown below, whsed earlier to project 20000 level for the Sensex during ‘2007, was broken when the Index moved below 17200. Break of

ong-term channel also weighed in favor of the larger corrective phase following this 8-year cycle.

Currently Sensex is attempting to hold its ‘2010 low if 15652. Once broken, a larger price/time damage would be indicated.

Appendix : Long-term scenarios for Sensex

s 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

orrective within this Complex Corrective phase formed as a "Non-Limiting" Running Triangle. This has been my preferred sce

or many years, which I had assumed to be under development since I began long-term forecasting during ‘1997-‘1999. This

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 y

rom Apr'1992 to May'2003. As I had shown, if one projects the width of this channel on upper side, such a projection also g

0000 as the “minimum” target. This forecast was achieved. This scenario is shown on the chart given below :





s per my second alternative, a Super-Cycle-Degree 3 rd (or 5 th ) began since Nov’84. Its internal 3 rd was an “extended” leg, w

chieved exactly 261.8% ratio to the 1st on log scale. The Sensex is now forming its 5 th Wave, and the same is likely to dev

s a ”Terminal”, because its lower-degree 1st wave since May’03 developed as a Diametric (a “corrective” structure rather tha

mpulse”).

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 v

wise, and 261.8% time-wise, as shown below.

Since the 5 th is now more than 61.8% of 3 rd , it may lead to a "Double Extension" scenario, wherein both 3rd as well as 5th w

e 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 com

wo Triangular patterns, one initially “Contracting” up to the "d" leg, followed by an “Expanding” one. The contraction point is

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 a

0% 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 5 th . Due to the corrective structure in th

eg, larger 5 th could be developing as a Terminal. Since ‘2008, we are into its 2nd wave, which could continue to develop o

ears from ‘2008.

The "Double Extension" scenario was also shown on following ASA Long-term Index (chart below). I've created this

ombining Index compiled by a British advisor (from '1938 to '1945), RBI Index ('1945 to '1969), F.E Index ('1969 to '1980)

Sensex (thereafter till date).

The wave-count presented on ASA Long-term Index favors the alternate wave-scenario discussed above. The labels show tha

market is into the lower-degree 5th of the SC-degree 3 rd or 5 th wave. If a "Double Extension" unfolds, Sensex could be proje

o achieve even 50000+.

break of 2 -4 line would confirm the Terminal development inside the 5 th , and would therefore, restrict the upsides to much l

evels than 50K, but end surely above 21000.

f the 5 th proves to be a Terminal, one larger-degree label of 3 rd will have to change to 5 th , because only a 5 th of the

an be a Terminal. The Super-Cycle-Degree marking for 1st and 3 rd shown, would then change to 3 rd and

espectively, as shown in White .




isclaimer : These notes/comments have been prepared solely to educate those who are interested in the useful application of

echnical Analysis. While due care has been taken in preparing these notes/comments, no responsibility can be or is assumed

ny consequences resulting out of acting on them.

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ICICI Direct.com _ Market _ Technical Analysis