Prediction

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

07 December 2009

YEAR 2016 WILL SEE ONE PEAK AGAIN & THEN A LOSS MORE THAN 63%

Sensex still in "b", which takes 23 days failing to retrace the 10-day fall

Last week I suspected that “b” leg (up) got over in 161.8% time ratio to “a” leg. But it didn’t. The “b” leg continued to form over the last week, completing 23 days as against 10 days that “a” took to form. 

I had pointed out that “Friday saw a late bounce from 61.8% retracement, forming a Hammer on the last day. Such Hammer-like action is generally perceived as a bullish pattern, especially if we see a follow-up positive trading sustaining above its head at 16719.”

Sensex did sustain above the head of the Hammer, and moving further higher, closed with a gain of 2.8% for the week. 

Realty, Metals, Healthcare and Small-Cap Indexes outperformed by gaining as much as 6 to 9%.

Since “b” now completes 23 days against the previous 10-day fall, it is still a slow and a partial retracement to the post-17493 fall, which proves its corrective nature, and therefore, justifies the “b” leg label put on it.

Since “b” corrected more than 61.8% of “a”, it was assumed that “Sensex could be forming a Flat since 17493 (Flat corrective pattern is a 3-legged 3-3-5 structure wherein “b” corrects more than 61.8% of “a”).”

However, since “b” leg corrected more that 80% of “a”, which was the pattern implication for a Double Combination move inside “a”, I observed that it could be indicating development of a Triangle/Terminal, inside which pattern implications are usually not followed, and said “We need to more clarity on this front.” This is still missing.

On one higher degree, a Double Diametric structure was assumed to have completed near 17500 level projected as per Chartacle (actual high was 17493).

As can be seen on the Daily chart, I’ve modified the initial part of the post-8867 (Mar’09) action. The Double Diametric scenario has now been modified to a single Diametric. This looks more justifiable because of time/price similarities of its constituting legs, as is required inside a Diametric formation.

The latter part of the structure (more than 2/3rd part), however, has been maintained as before.

As a result, despite the modification, the end-point for the larger “B” remains at 17493, from where “a” (down) and “b” (up) [of the larger “C” wave] were marked. Once the “b” leg is over, a move in the original direction, i.e. “c” leg downwards, should open. 

If the larger “B” leg is over at 17493 with a single Diametric, its smaller “g” leg should be retraced in faster time. This would mean a drop below 14835 (beginning point of “g”) by 16th Dec.

If the Sensex does not drop below 14835 by 16th Dec, the movement post-17493 would be labeled as “x”, preferably developing as a Triangle. 

Such an “x” would be the connecting wave between two correctives, both preferably Diametrics. This would be considered flat to positive for the market in the medium term, till 2nd corrective gets over. [Since the 1st corrective (Diametric from 8867 o 17493) was a 7-month affair, the 2nd corrective could also develop over a similar amount of time]. 

The latest 5-day move post-16210 is now labeled as smaller “c” inside the “b” leg, which has either ended already or will end soon. 

Watch for a faster break of the latest 0-b line, followed by a complete & faster retracement of “c” (drop below 16210), to confirm the end of the “b” leg from 15531.

Since “c” leg mimics “a” in behavior, it could open a violent downsides anytime soon, just like the “a” wave (which was the violent 10-day drop post-17493).

As “a” leg came down by 2160 points (12%) in 10 days @ 216 Points Per Day (PPD), “c” should come down at a similar rate, and achieve at least 61.8% magnitude to “a”. This would project a minimum downside of 16050.

The only case by which positive options remain open in the coming week, would need a “Close” above 17200-50, and that too, initially only for retesting the resistance at 17500. The overall label of “b” leg to the rally would remain as it is.

Behaviorally, Sensex is going through an expanding environment over the last three weeks, during which it could make lower lows as well as higher highs. 

Such a formation stands for extreme fight between bulls and bears. While bulls believe bears have no business to be in the market, bears feel exactly the opposite. The moment someone appears winning, the market reverses its direction.

Under such an expanding scenario, one should be remain alert to sudden reversals even if market makes a new high or new low, but consider such reversals as normal under such conditions.

The following chart compares last two rallies out of major downswings (which saw near-60% erosion in valuation), during ‘2003 and ‘2009. 

Both rallies look 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 current levels, it could also show a 60% retracement (11850) by March’2010.

Will the history repeat itself ? Whether this happens or not, it will be useful to be alert on this front. 

Remember, the ‘2003 rally was part of the bull phase, while the current rally is only a corrective “b” leg.

On the Weekly chart given below, alternative structures were shown, wherein a-b-c structure completed at 17500 as a Truncated Zigzag (with “c” measuring less than 38.2% of “a”). 

Bullish Diametric structure was mentioned as a distant possibility and a bullish alternative, especially if the Sensex trades strongly above 17500. Within this Diametric, “a” and “c” are equal time-wise, both consuming 13 weeks [Fibonacci], but “c” is smaller than “a”, and “d” is smaller than “b”. 

The Diametric assumption will need Sensex to sustain beyond 17500, to open upsides of 18100-900 for its “e” leg.

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

After showing falling volumes since 18th May, On Balance Volume (OBV) chart had shown a positive break above the (Yellow) resistance line.

However, it now appears moving in a band for the last five weeks, shown in Violet color, break of which would provide further clues.

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 21.71.

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. 

The suspected 3 to 5-year Triangle on Sensex would be the 2nd wave within the larger 5th wave.  

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 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 1st 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 5th, 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.