· Sensex holds 61.8% level, bounces 7%.
· RBI raises Repo Rate by 50 BPS and CRR by 25 BPS to suck out Rs.9000 crs.
· RBI lowers GDP growth target to 7.9% from 8.1%.
· Inflation closes in to 12%, hits 11.98%.
· IAEA passes India-specific safeguards agreement by consensus.
· Reliance Power to replace Dr. Reddy in Nifty Index.
· Merill Lynch to sell $39 billion worth of assets to meet mortgage losses.
· Bomb Disposal squad unearths 18 live bombs in
Sensex holds above 61.8% correction to previous Impulse, bounces 955 points
Last week, I said “Sensex could test 50% or 61.8% correction levels to rally (from 12514 to 15130), which are at 13826 and 13500, respectively … As the rally appeared to be an impulsive one, as per Wave Analysis, it is not expected to correct much more than 61.8%. The 13400-500 area, therefore, could be a crucial on downside …”
As contended, the rally got corrected to the extent of 54% and Sensex reversed smartly from the low of 13727 it hit on Tuesday. Gaining a hefty 955 points thereafter, it in fact closed 382 points or 2.7% higher for the week.
The bearish
The bounce also confirmed my impulsive assumption for the previous rally from 12514 to 15130. Examination of intra-day chart revealed that the bounce came from the 4th wave inside the 5th Extension Impulse, as per rules of the Wave Theory.
Previous rally had consumed six days. The current phase correcting this rally, should consume six or more days. Remember, corrective phase lasts longer than the move it is correcting. Within such correction, Index can re-test the 15130 level on upside and last week’s low of 13627 on downside.
Further, 5th Extension Impulse can see Irregular Corrective phase, wherein the “b” wave can cross the top of the Impulse. Which would mean possibility of Sensex crossing 15130 level, while still in a corrective phase. The “c” leg can, then, retest last week’s low of 13727 again.
At 15130, impulse from 12514 had corrected exactly 50% of previous fall (from 17735 to 12514). It was also exactly 21% gain, which is a Fibonacci Number, and achieved an equality with previous segment of rally (labeled as “x”) from 14677 to 17735.
However, the current phase (or what I called as a bear market rally) is a corrective to what appears as a well-channeled Triple Combination fall (from 17735 to 12514). It is, therefore, possible that it may even correct 60-70% of the fall, which I’ve marked as the “a” of 2nd corrective post-x.
We cannot, therefore, rule out 61.8% correction level, around 15500 getting tested on the upside, though it may not make much further strides than this. In view of this, if 15130 is sustained above, we may watch gap-down area 15259-390 and previous high at 15789 as crucial maximum upside limit for the present corrective phase.
The fall from 17735 had consumed 10 weeks. As per Wave Analysis, corrective phase consumes more time than the move getting corrected. The current phase (“b” wave) may, therefore, continue for more than 10 weeks.
Remember, since the upside for this phase is limited to about 60-70% retracement to fall, the phase could begin developing sideways, when it reaches closer to the upper limits, so that it can consume the necessary time. In fact, we may even see retest of 61.8% correction level (last week’s low of 13627) or even the lows near 12500 within this phase.
The “a” of second corrective appears to have been completed at a low of 12514, exactly within our targeted downside between 12316 and 12671. The current corrective phase would be the “b” leg of the second corrective, which can occur despite the fact that the market remains open for a protracted bear phase as per the 8-year cycle.
Bear market as per 8-year cycle develops over a time, within which, rallies are always possible. So long such rallies create lower tops, the bear phase continues.
The yearly channel, which I used earlier to project 20000 level for Sensex during ‘2007, was broken when the Sensex moved below 17200. Break of this long-term channel also weighs in favor of the larger bear phase as per 8-year cycle.
The 8-Year Cycle
A much bigger cycle is the 8-year cycle. 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 a separate para, I have, in fact, taken ‘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, wherein 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, had lost as much as 90% of their top valuations by the year '2003.
This year, we are sitting on this very important cycle, which therefore, may throw up similar possibilities.
PE Ratio had touched 8799 level equivalent on Sensex
The following chart shows PE Ratio plotted for Nifty-50 stocks, as taken from NSE’s published data.
The ‘Jan’08 top was the same as Feb’00 high of 28.47. This is the highest level of PE Ratio at least during the last two 8-year cycle tops. Chart reacted from this level and is currently testing its Mar’07 low near 17.20. The chart is so consistent that its shows nice technical channels for both up and down cycles.
The recent low of 16.33 was close to Sensex equivalent level of 8799, and the same attracted buying for a pull-back to channel, supporting my argument of upward corrective phase.
ASA World Index also stabilizes
On the Daily chart of ASA World Index (which is based on all active stock market indices of the World), I have shown the possible wave-count.
This wave-count shows “c” leg of corrective achieving equality with “a” leg, as a result of which, the Index shows some stabilization for the last few weeks. Such stabilization in the Global scenario could also help create a 10-week-plus long corrective phase for our market.
Alternative scenarios for Sensex
As far as larger wave scenario is concerned, I have been explaining 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, the breakout from which has already occurred. This has been my preferred scenario for many years. (Remember, Non-limiting Triangles, as the name suggests, do not impose any limit on the post-pattern behavior).
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 gave 20000 as the "minimum" target for Sensex. The same has been achieved already.
As per the alternative bearish scenario, a Diametric had been developing into Sensex' 5th leg of impulse. In this alternative, the 4th wave ended at May'2003 low near 2904. The 5th leg, being a non-extended wave of the Impulse, should not have gone much beyond 61.8% ratio to the 3rd, which projected a maximum of 13300. In this argument, the 5th wave was assumed to be the "non-extended" leg within the Super-cycle degree 3rd which began at 259 in Nov'1984 as shown below. (in an Impulse pattern, only one directional leg can be the extended leg.) As per this wave-structure, the 3rd (of the 3rd) was shown to be the extended leg, which achieved exactly 261.8% ratio to the 1st on log scale. The 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.
There are good ratios present within different waves, as explained on the chart, to support this scenario. However, the Sensex sustaining well above 13300 may lead to a "Double Extension" scenario even by this alternative, wherein both 3rd as well as 5th would be extended waves.
The development into 5th wave was read as a "Diametric" formation. It was explained that the well-channeled legs, with a subsequent correction of less than 61.8%, led to the suspicion of a "Diametric" formation. (Remember, channeled moves usually indicate complex correctives, which should normally get retraced by more than 61.8%, except within the new pattern called "Diametric"). Diametric formation has 7 legs, marked as a-b-c-d-e-f-g. It is called a "Diametric" because it combines two Triangular patterns, one initially Contracting up to the "d" leg, followed by an Expanding one, thereafter. 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% gain. Similarly, "g" achieved equality to "a", both showing about 115% gain.
This Diametric could be taken as the 1st of the 5th (5th, which, due to its corrective structure, could be developing as a Terminal wave). This Diametric in the 1st leg of probable Terminal wave appears to have ended at 'Jan'08, and we may be looking at the 2nd wave downwards within this Terminal.
.
The "Double Extension" scenario was also been shown below using ASA Adjusted Long-term Index chart. I've created this chart combining Index figures compiled by a British advisor (from '1938 to '1945), RBI Index figures ('1945 to '1969), F.E Index ('1969 to '1980) and Sensex (thereafter till date).
The chart shows the Super-Cycle-Degree count that I had been presenting since many years ago. The labeling shows that the market is into the 5th of the SC-degree 3rd wave. This 5th leg (within SC degree 3rd) may have begun either from 2904 (May'2003) or from 7656 (Oct'05). In case of the "Double Extension" scenario turns out to be true, Sensex could be projected to achieve even 50000+.
Technical Analysis - Stocks
Correction levels
50% and 61.8% are standard technical correction levels for any move. These ratios work for correctives to up-move as well as down-moves.
Following chart of Sensex shows how 50% correction level worked during the 1992-93 bear phase. After each fall, Sensex corrected 50% of the fall. The bear phase continued so long as Sensex kept on creating lower tops.
One may use these correction levels while trading individual stocks as well. The recent examples of 50% and 61.8% levels can be seen on following charts :
1. Tata Power
2. Idea
3. Dena Bank
4. L & T
5.
No comments:
Post a Comment