Weekly Technical Analysis

01 Feb 2010
- By Vivek Patil, India's foremost expert in Elliot Wave Analysis

Top Stories of the Week

• Sensex loses further 3%, touches 6-month ago levels.

• Moddy's project 8.3% growth rate for India during '2010.
• US President talks about ending tax breaks for outsourcing companies.
• Crude/Gold/Silver/Metals tumble further on rallying Dollar Index.
• FIIs continue their selling spree.

Sensex at 6-month ago levels, touches 16K - 15331/'Feb remain crucial price/time zone

Last week, it was argued that “Friday’s action shows a gap-down at 17000-25, which would be decider in the short
term. The bias on the Daily chart is negative, and the same can turn positive only above this gap … shorts should
keep stop-loss above it … Gap-down actions can have measuring implication, and that would seek a
downside of about 16200-300 …”

Wave-wise, I said, “we have the 1st stage of confirmation at hand that “b” leg rally from 15331 is over. We are now
watching for 2nd stage of confirmation by way of a drop below 16577 (the beginning point of c within a-b-c inside “b”).
Drop below 16577 would confirm that the “c” (of larger “C”) began from Jan’10 high.”

The week saw Sensex losing further 3%. Week’s low, at 15982, was well below 16577 and touched 6-month ago
levels. While all sectoral indices ended lower, Metal-Realty-Auto Index shed 6% or more. Small-cap Index finished
5% lower.

The Weekly candle formed as a bear candle, but carries a lower shadow indicating supportive efforts near 16K
level.
Last week’s low at 15982 measures as 1800-point or 10% cut from 6 th Jan high of 17790. As I argued previously,
“History has shown a minimum cut of 5.5% from initial highs during every ‘Jan.” The 10% drop meets the requirement
of this anniversary cycle.

As mentioned earlier, the initial part of ‘Jan is always a crucial time zone. The year-wise % corrections seen
from ‘Jan highs are as follows : 9th Jan’2002 : 5.5%, 10th Jan’2003 : 15%, 9th Jan’2004 : 32%, 4th Jan’2005 : 9.5%,
9th Jan’2006 : 5.5%, 4th Jan’2007 : 5.5%, 10th Jan’2008 : 64%, 7th Jan’2009 : 23%.

The 16K-mark is actually the Aug’09 high on Sensex. All previous tops are important technical levels. Holding
16K, therefore, can be considered positive.

Remember, Sensex has seen a continuous drop for 8 days (Fibonacci number) since 18th Jan. (Even the fall from
21206 to 15332 during Jan’08 lasted for an exact 8 days). Short term oscillators do reach oversold zones within
8 days.

Any positive scenario holding 16K would have potential to test 16577 (last low or beginning point of the last rally)
or 17000-25 (gap-down area created on 22nd Jan).

Failure to hold 16K, on the other hand, could test 15600 (high of Jun’09 and 200-day EMA) or 15331 (low of
Nov’09).
On the chart above, I had pointed out some interesting time analysis. Look at the time rhythm during post-Jan’08 fall.
Sensex was dropping for about 10 weeks, with an average 7 weeks of intervening segments of rally.

For the current rally post-Mar’09, the time rhythm shows rallies lasting about 13 weeks, with 3-5 weeks of
intervening drops.

Thus, a 2000-point cut, lasting for 3 to 5 weeks, has been a normal phenomenon during the rally. Anything
beyond these parameters would, in other words, be considered abnormal.

Based on this very theory, it has been contended that Sensex can remain positive if it holds about 15331 by
Feb’2010.

Wave-count-wise, downside holding above 15331 can be marked either as “x” (as shown on the opening
chart), OR as “f” as per the alternative structure presented on the chart above.

As for the price-structure of this rally, I pointed out that “each subsequent rallying segment has been 55% of the
previous rallying segment. It indicates loss of bull-power, despite hitting newer highs of the larger rally.” As
presented, “e” was 55% of “c” and “c” was 55% of “a”.

The non-directional segments, i.e. “b” and “d”, area almost equal price-wise as well as time-wise.

The up-move since Mar’09 is, therefore, marked as a possible Diametric as shown by this alternate
assumption.

The current drop from Jan’10 high of 17780 becomes its “f” leg, after which, the last leg, i.e. “g” leg, would
develop upwards, preferably reaching levels higher than 17780 (even 22000), if it is not a Failure leg.
The “f” leg may or may not hold the low of “d” at 15331. That is because Bow-Tie Diametric (as marked
above) combines two Triangles, Contracting (first half), followed by Expanding (latter half).

The “g” leg can be a Failure leg, wherein the development over the last 8 months would be seen as a
Rounding Top formation.

Structurally, by both the alternate structures, larger rally since Mar’09 continues to be marked as a “B” wave
against the 14-month fall from Jan’08 considered as the “A” leg.

In Triangles, as I pointed out earlier, “B” leg can consume lesser time than “A”. As per the 1st alternative, “B”
finished at 17493 in Oct’09, i.e. in 7 months since Mar’09.

The 1st alternative, the preferred one, would suggest a 3-5 year long Triangle formation from Jan’08. “C” has
already been forming for downward targets of 13500 (Gap-up of May08) / 11850 (60% correction level) / 10600
(80% correction level).

[Remember, we continued to mark the move post-15331 as a “b” leg, because time-wise, wave-b of a Flat can be 5-7
times than wave-a, only beyond which it would have become suspicious.]

As per the 2nd alternative, the Diametric “B” leg will finish when one lower degree “g” leg is over.

[The “B” leg of a Triangle can form as a 3-legged pattern (Zigzag or Flat) or as a 7-legged pattern called Diametric.
We cannot mark “B” as a 5-legged pattern, i.e. Triangle.]

The most bullish option (the 3rd option) would be marking the a-b-c Flat from 17493 (Oct’09 high) as an intervening “x”
wave in between two Diametric formations. However, this option can confirm when we see a faster retracement
above 17790.

Despite the best efforts, if Sensex cannot hold on to the 15331 level by Feb’10, our 1st alternative would be in
works.

Failure to cover the falling gap of 22nd Jan, at 17000-25, could provide an advance indication of weakness
(and that too, at a higher level).

The 1st alternative also brings in the implications of 2-year cycle, described elsewhere in this Report, which
would indicate a major top having been formed already near the revised target level of 17500.

Going by my 6-month old arguments : (1) the PE ratio is touching maturity level under normal conditions of the
market (2) Sensex has doubled from its bottom levels (3) the main buying force, i.e. FII investment, has been
generating reducing returns (4) Daily Oscillators are on –ve Divergence (5) Weekly Oscillators are in negative
mode.

These arguments have ensured that whatever euphoria we saw in the market was limited only to select
individual stocks. Sensex itself has been oscillating around 16000 level for last eight months since Jun’08.

If we see bullish alternatives taking over, the current rally would still be labeled as the “b” leg of the multi-year
larger Diametric structure from Jan’2008, just like the large consolidation we saw from ‘1992 to ‘2003.

[Technical readings carried forward from previous weeks are shown in italics. Readers can easily identify the
new arguments given in regular font]

As can be seen on the Monthly chart of Sensex given below, the current rally has a questionable base-line.

All previous rallies on Sensex maintained the base-line, break below which led to a sizable price-time
correction. The ‘2009 rally, therefore, turns out to be unique in nature, somehow holding higher so far.

Going by historical examples of base-lines, benefit of doubt may be extended till the 3 rd change in the base-line,
holding which, Sensex could still move higher towards 22000 levels (as “b” becomes part of a Diametric instead of
Triangle, as explained elsewhere).

The ‘Jan candle is completely below the 2nd line, and therefore, unless it immediately pushes above it, it
would face danger of dropping to the 3 rd line.
However, break below 3rd such base-line should signal end of the “B” leg, whenever that happens. Example of
the rule of “3” is shown on the Monthly chart of Dow below :
A time-consuming “b” wave (as assumed for the post-15331 move as per the preferred scenario presented on the
opening chart) can generate an oversized “c” wave as per an Elongated Flat scenario, like the one which was seen
during ‘2004.

During ‘2004, market had shown a rally similar to what was been during ‘2009, a 115% gains in eight months.

Sensex had corrected ‘2004 rally by 60% price-wise in 60% time, forming like an Elongated Flat, as shown on the
following chart :
The following chart compares last two rallies out of major downswings (which saw near-60% erosion in
valuation), during ‘2003 and ‘2009. Both rallies are similar in terms of the time consumed and gains registered, both
gaining about 115% in about 8 months.

On its maturity, the ‘2003 rally got retraced by 60% in 60% time, dropping to 4227 before the next move. If the
current rally matures at the current levels, it could also show a 60% retracement (11850) by March’2010.

As I have saying, "Will the history repeat itself ? Whether this happens or not, we need to be cautious on this
front."
The 1st quarter of every 2nd year has proved a turning point on Sensex’. Beginning Jan’1980, most of the turning
points can be seen occurring during Jan-Mar period of an even year, as marked on the chart.

We are now in the 1st quarter of ‘2010, which is an even year, therefore, at a turning point as per this 2-year
cycle.
After showing falling volumes since 18th May, On Balance Volume (OBV) chart had shown a positive break
above the Yellow resistance line.

OBV now appears critically poised, testing its 3-month lows shown as the Red line.
Sensex maturing near 17500 would support my argument that market usually corrects after doubling. Ratio
of 200% can be seen even for all the first rallies coming out of bear phases :

- After a 24-month bear phase during 1986-88, Sensex doubled from 390 to 798 and went into sideways
consolidation for about a year before moving further up.

- After a 13-month bear phase during 1992-93, Sensex doubled from 1980 to 4643 and went into sideways
consolidation for about four years before IT bubble happened in 2000.

- After a 39-month bear phase during 2000-03, Sensex doubled from 2904 to 6250 and saw a quick 60% retracement
before resuming the bull phase.

Remember, 17500 is about twice the value of Oct’08 low of 7697 or ‘Mar low of 8047.

I also explained my PE Ratio argument previously. I argued, “At its highest level of 15600 on Sensex, PE Ratio
had reached 21+, which is near the maximum figure of 22 seen under ‘normal’ circumstances. Only bubbles
can push it higher towards 28. Such bubbles happened during ‘2000 and ‘2008, which were 8-year cycle tops.
It takes 8 years to build a bubble. Bubbles have never been seen in two consecutive years.” Currently, as of
this Friday, the PE ratio is at 22.24 (against 23.46 last Friday).

Previously, I assumed end of Triple Combination since Jan’2008, finishing at 8867 (20th Mar'09). Since Triple
Combinations can occur only as a largest leg of Triangle, I contended that “we may be into the next upward wave,
‘b’ wave, which could correct the 14-month long Triple Combination by as much as 50%.” Under Neo-wave
Theory, 70% is the pattern implication for any Triple Combination.

However, I said “In Triangles, one can only have guesstimates. Triangles are exception to virtually all rules … As
a general rule, one can say that 3 out of 4 retracing legs of a Triangle would retrace a “minimum” of 50%. (This
ratio was, accordingly, used for projecting 14500 earlier).

The rally from Mar'09 did an exact 70% retracement to 14-moth fall. If the Sensex moves decisively beyond 17500,
then the “b” leg can even travel further up, perhaps testing Sensex’ 2008’highs.

In such a case, Sensex will go into a longer consolidation, lasting a decade or more, (similar to its consolidation seen
during ‘1992 to ‘2003), though at a higher range contained within equidistant the parallel channel drawn for 1992-
2003 period, and shown elsewhere (in Yellow color on a monthly chart).

The current “b” leg, in such a case, would become “b” of much larger Diametric (instead of “b” of Triangle I’ve
assumed currently).

Since “A” leg consumed about 14-15 months since Jan’08, the entire Triangle, consisting of five legs, could
consume 3 to 5 years, beginning ‘2008.

Whether the move post-Jan;08 develops as a Triangle or Diametric, our trading/investment strategies should
be designed accordingly over the next 2-3 years.

The suspected 3 to 5-year Triangle OR 10-year-long Diametric on Sensex would be the 2 nd 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 last chart of this Report (Yearly chart), which shows the 2-4 line and
its values for the next three years.

Remember, Terminal development usually violates the 2-4 line, and Triangle in the 2nd wave position is
allowed only inside a Terminal Impulse (and not in a normal impulse).

The yearly channel, 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
as per 8-year cycle.

The current rally appears stalling near the breakdown level at 17200.
The 8-Year Cycle and its implications

The Sensex is assumed to be under a larger 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 a separate paragraph, 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, 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, and most are below their top levels even today.

Last year, we were sitting on this very important cycle, which therefore, threw up similar possibilities.
Remember, every 8 years, market does see a deep cut in valuations. 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. Time-wise, ‘1992 cycle completed the bear phase in 12-16 months, while the ‘2000 cycle took 19
months only to hit the low, which was then followed by 19 months of base formation before bull phase could begin
again.

I had, accordingly, targeted sub-10k levels for Sensex price-wise, and a minimum of 13 months into bear phase time-
wise. Index achieved the forecast price/time targets.

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 happened. This has been my preferred scenario for many years.

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. The forecast was achieved.
As per the alternative scenario, a Diametric developed into the 1 st of the 5th leg. 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 3rd which began at 259 in Nov'1984 as shown below].

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.

However, the Sensex sustaining well above 13300, may lead to a "Double Extension" scenario, wherein both 3rd as
well as 5th would be extended waves.
Diametric formation has 7 legs, 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, 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% gains. Similarly, "g" would be equal to "a", both showing about 115% gain.
 .

This Diametric development from 2003 to 2008 could be taken as the 1st of the 5th, which, due to corrective structure
in 1st leg, could be developing as a Terminal. We may be into its 2nd wave, since ‘2008, which, could be forming as a
Triangle.

The "Double Extension" scenario was also shown on 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). If a "Double Extension" unfolds, Sensex could be projected to
achieve even 50000+. Break of 2-4 line, however, would confirm the Terminal development inside the 5 th, and would
therefore, restrict the upsides to much lower levels, though higher than 21206.

If 5th proves to be a Terminal, the larger label of 3rd will have to change to 5th, because only a 5th of the 5th can
be a Terminal. The 1st and 3rd shown, would then change to 3rd and 4th.