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Since two weeks ago, I have been arguing that the a-b-c move from 12558 (18th Sep) to 13203 (1st Oct) is possibly an Irregular C-Failure Flat, and that “Irregular C-Failure Flat is an extremely bearish assumption to make, which can potentially take the Sensex below 10K levels within just 9-10 trading sessions.”
Coming as a corrective within a downtrend, this pattern indicated downside power through “b” forming as irregular and “c” failing to retrace the “b” completely. In our case, “c” could achieve only 61.8% of “a”.
Under wave analysis, each completed pattern transfers a specific power to the next move, and many may not be aware that such pattern implications are well defined. Based on the pattern implications, I had argued that, “larger ‘c’ or ‘3’ can potentially achieve 161.8% ratio to ‘b’ of such (Irregular C-Failure) Flat as projected from end-point of the Flat at 13203. This calculates a downside target of 9857, which should be achieved within the total time of such Flat, which in our case was 9 days.”
Sensex dropped to 9911 this Friday which was the 10th day of fall. Considering the tolerance of about 1%, both price-wise and time-wise, we can accept that the projected pattern implications are met with.
From 13203 (end-point of Irregular C-Failure Flat), Sensex has indeed lost 3292 within 10 trading sessions, at an average of 329 points per day. That’s 25% value erosion within a short time. BSE Metal Index lost 37%, Cap. Goods and Realty Indices shaved off 34% and 31%.
Even other markets, which had shown patterns similar to Irregular C-Failure Flat, suffered during the period. Australian ATX Index shaved off 32%, Nikkei 25%, FTSE 23%, Dow 22%. Crude also dropped 29%.
While I projected severe downsides in quick time, last week I also suggested that “we may look out and protect ourselves from value-buyers at lower levels. Remember, sharp drops can also lead to sharp counter rallies even within an overall downtrend.” This suggestion was timely. We indeed saw such hefty counter-rallies on Monday as well as on Thursday. Only those who had complete faith in the pattern implication would not get sucked into such rallies. The week finally ended at the lowest point, below 10000.
The low at 9911 achieved my long-time target below 10K, which I had promised on 18th Jan of this year. This was purely a technical call based on the 8-year cycle I had discovered. Detailed explanation on this cycle study is given separately. This cycle shows a cut of 55-58% from the respective top value. In the previous 8-year cycle top during ‘1992-93, Sensex lost 56% from 4546 to 1980. In the next cycle top, the cut was almost 58% from 6150 in ‘2000 to 2594 in ‘2001. I, accordingly, argued that in ‘2008 we are sitting on such a cycle, and therefore, from its ‘Jan high of 21206, Sensex may drop to sub-10000 levels. With last week’s low at 9911, this forecast is met.
Remember, technical analysis “always” provides a guidance much ahead of fundamentals, not only at the tops but also at the bottoms. Now that the economic fundamentals have “officially” gone bad, technical analysis would provide right signals at a right time soon.
Sensex’s immediate support area is at 8799-9875, which matches with the significant lows it made during ‘2006.
Time-wise, I argued, “‘… such a phase would last for at least 13 months (beginning Jan’08), and may require consolidation thereafter, before the next bull phase can begin. As long as Sensex keeps on making lower highs, the bear phase continues.”
While the value target below 10K has been achieved, the time targets are still to be achieved. Remember, in technical analysis, both time and price forecasts must be achieved.
From the channel perspective, the upper limits for the bear market rally can be seen closer to the upper end of Purple channels, which I have been showing on the Weekly chart below.
Previous lows at 9875 and 8799, as marked, are levels closer to our projection based on the wave-structure as well. If the Sensex gets supported here, we could see a recovery.
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.
FIIs continue to withdraw
The important hallmark of this bear market has been heavy withdrawal by FIIs. The following monthly chart of FII Net Investments shows a clear break of the 14-year long Monthly channel.
I have shown an equidistant parallel on downside, value of which indicates that we may see more withdrawals to the tune of Rs.50000 crores. Remember, with FIIs withdrawing about Rs.50000 crores since ‘Jan has already brought the Sensex down by 50%.
The FIIs withdrawing from equity market has resulted in Dollar outflows from India, reducing domestic supply of the currency for local importers. As a result, since ‘Jan highs, while Dollar appreciated by 20%, the FII net Investment had also reduced by about 20%.
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.
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.
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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+.
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The last bar is a big engulfing thing and does not give me any confidence in we seeing higher prices.
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