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Last week I wrote, “With two gap-up moves already in place, Index is now preparing to take on the 10K-mark and move beyond the 8-week long falling channel … Another gap-up from here would be the 3rd gap-up action within the current rally, which will have potential to prove as an Exhaustion Gap. Whether it indeed turns out to be so, will be proved within the first three trading sessions of the week … The technical position will soon reach the over-bought zone. We may, therefore, consider 10260-10787 area to be maximum upside for the time being, and look for gradual profit-booking at higher levels if required.”
Sensex indeed gapped on the very first day of the week (3rd gap-up action), which proved to be Exhaustion Gap within the next three trading sessions, as argued. By Thursday, down 1314 points from the high of 10945, the Index had closed this gap, losing all that it gained during the first three days of the week. With its high at 10945, Sensex had marginally overshot our target area mentioned at 10260-10787. Nifty, however, was well within the equivalent target levels.
Remember, once we see a 3rd or 4th gap-up in any move, its always better to be cautious, as technical position reaches an over-bought zone.
This turned out to be a nice 42% rally in just 6 trading sessions, and was the strongest rally so far since ‘Jan. It not only proved my contention for a short-term reversal, but also generated decent profits under the circumstances.
Remember, however, profits would have been trimmed or even disappeared if we did not have the profit-booking policy in place. I had, accordingly, advised a gradual profit-booking on long positions.
The current rally from 7697 10945 was the biggest and the fastest first segment of all bear market rallies since ‘Jan this year. Examine the previous rallies :
(1) The rally from 15332 (22nd Jan) to 18491 (29th Jan) was 21% in 5 days.
(2) The rally from 14677 (18th Mar) to 16452 (28th Mar) was 12% in 6 days.
(3) The rally from 12514 (16th Jul) to 15130 (24th Jul) was 21% in 6 days.
Time-wise, all the first segments lasted for about 5-6 day, and the same was the case for the current rally as well. Technically, we were able to enter as well as exit at the right time. It was purely on the basis of this time observation.
Price-wise, further examination of all the first segment of rallies since ‘Jan, shows that :
1. The ‘Jan rally got corrected by extent of 34%.
2. The ‘Mar rally was corrected by 64%.
3. The ‘Jul rally was corrected by 53%.
Remember, all of these correction levels are close to the Fibonacci ratios.
If the ensuing correction can hold to Fibonacci correction levels to the rally, then it can also turn out to be a medium term reversal. The 38.2% - 50% - 61.8% Fibonacci correction levels would work out to 9704 - 9322 – 8940, and the same have been marked on the chart.
Levels around 10116 can be seen as crucial in the immediate short term, as the same were the lows for last Monday/Tuesday. For opening further upsides, therefore, we need to see a strong action above 10116, and even a close above it. Such a follow-up would confirm the support at the 38.2% level to the 6-day rally from 7697 to 10945. This will be our bull case scenario.
In case the Sensex takes support at the Fibonacci correction levels marked, the short-term reversal we were expecting since last week, can turn out to be a medium-term reversal, which will not break last week’s low of 7697 till this year-end. Why ?
The following chart shows why. Movement since ‘Jan shows a particular pattern for the current bear phase, at least so far. Sensex shows falling segments lasting for 10 to 11 weeks, which are then followed by rallying segments lasting anything from 4 to 7 weeks.
As per this phenomenon, we are likely to see the bottom at 7697 holding till the end of this year, resulting in a positive market for the next 4 to 7 weeks.
Wave-structure wise, as I observed last week, the C leg from 15107 achieved 161.8% ratio to A (from 16632 to 12514). Time-wise, C consumed exactly the same time as A.
Based on the 8-year cycle, since ‘Jan I have been arguing or a 55 to 58% cut from the top. Remember, 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. At the recent low of 7697, we have already seen a near 63% cut from the top of 21206.
Prior to this, the wave-structure showed us an Extracting Triangle within the bear market rally from 12514 to 15107, which was marked by reduction in rising legs and increase in falling legs. Such a structure was already indicating a severe drop.
From 15107, Sensex has been forming a “c” leg down. Though we normally expect 5-legged Impulse formation in “c” wave, the “c” of Triangle / Terminal / Diametric formations have Corrective label. I am, however, assuming a channeled Complex Corrective in the current “c” simply because it is helping our trading strategies.
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.” However, while we wait for higher top higher bottom to form, a quick counter rally as a result of support at the current lows can give a short term trading opportunity.
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. Long-term investors better wait till then.
From the channel perspective, the upper limits for any bear market rally can be seen closer to the upper end of Purple channels, which I have been showing on the Weekly chart above.
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 selling halts a bit
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. 30000 crores.
Some positive ticks were seen on this chart during the week however.
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 26%, the FII net Investment had also reduced by about 21%.
The charts are slowly turning for better (in favor of Rupee), as you can see.
PE Ratio improves from new lows of the decade
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 tested Mar’07 lows near 17.20. The chart is so consistent that its shows nice technical channels for both up and down cycles.
The recent low of 10.68 was very close to Sensex’ May’2003 lows. This ratio smartly recovered in the rally.
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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