Weekly Technical Analysis December 31,2012 - By Vivek Patil, India's foremost expert in Elliot Wave Analysis

Top Stories of the Week Sensex ends 1% higher in the truncated week, maintains 4-week range. India Inc's interest burden reported to be at 9-year high. Govt proposes Diesel prices to be hiked gradually @Re.1 per month. Market hinged on fiscal cliff negotiations, year-end NAV consideration. Job generation saw 21% decline during '2012, as per Ass. Chamber of Commerce. Thorat Committee recommends asset size of Rs.25 crs for NBFCs. Ratan Tata retires, Cyrus Mistry takes over Tata Group.

2-week high-low, i.e. 19504-21 and 19149, appear crucial as we enter '2013

[Technical readings carried forward from previous weeks are shown in italics. Readers can easily identify the new argumen which are written in regular font]
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Last week we discussed, The action is maintaining itself to a small range for the 3 week running A rough channel ca nd drawn around the action provide flat perspective to the ranged action, which we structurally marked as the 2 leg in th nd nd st st the 5 of c of larger D 2 looks incomplete 2 can consume 161.8% time compared to the 1 , and retrace 1 to 61.8% ever since Jun12 lows, all rallies were retraced by about 50% We may watch the last weeks low, an downsides to 50% levels only when same is broken decisively Till a falling segment is retraced completely in fa nd time, the 2 would be continuing to form.

Sensex held previous weeks lows, and attempted to recover during the 4-day long truncated week. Though it finish percent higher for the week, the weekly range remained enclosed inside the previous weeks high -low. It, in effect, create Harami or inside Bull candle for the week. While most sector ended flat to +ve, the Oil&Gas and Realty Index outpe with over 2% gain each.

Since the action remained inside our channeled flat range for the 4 week, and there was no retracement of any falling seg nd far, we may continue to assume Sensex is still forming the 2 leg.
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The 2 leg is correcting the 1 leg from Nov lows to Dec highs. So far, 2 had corrected the 1 by only 38.2% price-w st th nd and about 100% time-wise. After completing the 1 on 6 Dec, the 2 has so far consumed 13 days. The 2
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will be assumed to be continuing till we see faster retracement of its last falling segment.
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The downside potential of 2 is 50% retracement to 1 , but since it is maintaining a range for 4 weeks so far, we will o downsides towards 50% retracement levels only if the action weakens below 4-week lows of 19149 (Nifty 5823).

The 50% retracement level to the preceding rally from Nov lows to Dec highs calculates to about 18900 -50 (Nifty 5750-60 marked on the chart above. As can be checked on the chart, all the rallies since Jun12 were retraced by about 50%. st (1) 1 rally from 15749 to 17631 was corrected to 16598, i.e. about 50%. nd (2) 2 rally from 16598 to 17973 was corrected to 17251, i.e. about 50%. rd (3) 3 rally from 17251 to 19137 was corrected to 18256, i.e. about 50%.
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Meanwhile, traders have been forced to remain in a trading mode for the 4 week running. Index cannot remain in such a for a long time, and would break it eventually. For an upside break, the crucial levels could be the 2-week highs of 19504-21 and the top of 1 at 19612. Upside break would be labeled as the 3 leg, which could remain smaller than the 1 leg because we are initially st th assuming the possibility of 1 Extension Impulse inside the larger 5 wave of c of D.
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On downside, well continue to watch the 4-week lows of 19149 (Nifty 5823), weakness below which will be require open lower levels towards 50% level marked on the charts, at 18900-50 (Nifty 5750-60). For confirming that 2 nd 2 .
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leg is over and 3 has opened upwards, we require faster retracement of the last falling segment ins

On a higher degree, we had assumed that larger D leg began in Dec11. The rally to Feb12 high was its a leg, and th Jun12 low its b leg. The c leg from Jun12 onwards is hitting the parallel channel drawn around the a-b-c legs of

inside D.

We had argued that since the year 2000, except for 2001, the month of Dec always created a Bull candle . However led to maturity of the rally in the next 1-3 months.

We, accordingly, may be leading to a major topping formation soon. Such a formation could see rallies getting smaller from st th structurally a 1 Extension Impulse or Terminal inside the 5 of c.

Coming to last week, though the action formed a Bull candle, its high-low range remained enclosed inside previous Weeks candle. Harami candles, ranged inside previous day, are generally conside red indecisive.

The high of the candle has still not cleared the Pink resistance line drawn joining previous two highs inside the ranged th th of last three weeks, i.e. joining the highs of 19612 (11 Dec) and 19521 (20 Dec).

On the Nifty Future chart, a similar line (joining the tops) was broken on upside. However, even on Nifty Future, the movem remained inside its 3-week range, and failed to cross previous weeks high of 5961, which appears crucial.

On Sensex itself, below the four trading sessions of last week, an approximate support line can be drawn on the downs the same has been shown on the Daily chart in White color. On an immediate basis, on the last day of 2012 today, we watch this White line on downside. If the Index begins weakening below this White Line, it could send -ve indications. This line is valued closer to Fridays low 19346 (Nifty 5879).

Dec12 opened at 19342 (Nifty 5878). If this Monday ends anything above this level, the monthly action would end a Bull candle. Except for 2001, the month of Dec always ended as a Bull candle, ever since 2000.

The Yearly candle for 2012 would also end as a Bull candle, but would remain as an indecisive Harami or Inside high-low of 2011. If the Index fails to hold even the 50% retracement levels, it could drop lower to test the 2-4 line, as shown on the chart.

As per NEoWave, the break below 2-4 line would either indicate that the Impulse that started from Jun12 onwards th over, OR the 5 is developing into a Terminal.
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Inside a 1 Extension Impulse, its lower-degree 1 would be the largest rally, and 3 and 5 would show smaller ra th because of which the 5 of c would shape up like a Diagonal Triangle.

The channel enclosing the a-b-c Flat inside the larger D leg from Dec2011 onwards was shown on the chart below. The n th projection, shown on 17 Sep12, is now exactly achieved at the upper end of the channel, price-wise and time-w Can it achieve something more ? Once we confirm opening of 3 o faster retracement above 2 , we will be looking for the 2 19800-900.
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target area mentioned

As was mentioned, while on arithmetic scale the value of the upper parallel line was at about 19400 -500, which we st considered as our 1 target (Nifty 5950-6000), it comes to about 19800-900 (Nifty 6100-6150) on log scale, which nd considered as our 2 target. On one higher-degree, it was explained that the D leg from Dec11 onwards was part of a larger 7-legged Bow-Tie Diametric.

This larger Diametric begins from 2008, and could develop similar to the Diametric formed during 1992 to 2003 , a shown on the Monthly chart of Sensex below :

This long-term picture was fist published on 6 Feb2012, with both D legs highlighted in Purple color rectangles.

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While the Upper line of the latest Rectangle was at 80% retracement level (Sensex 19800-900) to C leg, the Right lin drawn at Dec12 (the current month). The Sensex is now close to the maturity levels shown by this proje ction, pric as well as time-wise.

As per NEoWave, most channeled moves enclose a Complex Corrective structure involving x wave. Complex Corrective involving 2 correctives, joined by one x wave, is called a Double Combination, and carries a patte rn implication more than about 80%.

Note that the C leg from Nov10 to Dec11 was a Double Combination, with two equal -sized correctives (see weekly above), and therefore, carried a pattern implication of 80% retracement by the D leg.

Further, as depicted on the chart below, since Nov10, it has been generally useful to consider 61.8% to 80% retracement a crucial for terminating moves.

This chart also shows 61.8% and 80% retracement level to the entire fall from Nov10 to Dec11 a s maximum upside possib D leg.

Meanwhile, since the FII activity turned a prominent factor in the Indian stock market, we examined the development of BS Dollex-30 Index, which recently showed a Head & Shoulders formation on its Daily chart.

Its downsides later achieved the Head-to-Neckline projection on downside, as we expected. Since the projection leve matched with its 200-day EMA, we suspected some pull-back to the Neckline.

One may also note that while Sensex recently made a higher high compared to Oct12, Dollex-30 maintained a lower

As can be seen on the Dollex-30 chart below, the Index reacted downwards from the Neckline level, and is now perha forming a falling channel shown in Red.

As per Wave Theory, Flat is a 3-legged corrective pattern marked as a-b-c, where b corrects more than 61.8% of a. It is 3-3-5 pattern where a and b carry corrective label of :3, and c is an impulse label of :5.

Around a Flat, we usually draw a line joining 0 and b (0-b line), and take a parallel from the a point. The c leg should normally end near such parallel. The channel indicates similarity of its 3 internal legs, reason why Flats are called Fla

Unless it proves to an Elongated Flat (a sub-type of Flat where c becomes longer in terms of time and price), wed initial assume any Flat to be a common Flat. This could mean c may end either near 19400-500 (arithmetic-scale value of the parallel) or 19800-90 (log-scale value of parallel).

Time-wise, Dec has always proved a +ve month since the 2000, except during 2001 and 2011. At the same time, exc 2006, all major/minor tops occurred during Dec-Mar period. We cannot, therefore, rule out the 1-year long D-leg Flat from Dec11 would end during this period. Inside c of D (beginning Jun12), we were expecting a 5-legged Impulse, because Flat is a 3-3-5 structure. As per NEoWave Extension rule, one of the directional leg inside an Impulse should get extended, i.e. achieve 161.8% ratio to largest leg.
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Since 1 and 3 were normal, we can see a 5 wave extending inside c of D. However, such a move would project valu slightly above the Nov10 highs, which would jeopardize the larger assumption of Bow-Tie shaped Diametric from 2008 o

Wed, therefore, prefer 5 of c not to achieve 161.8% ratio, but terminate below Nov10 highs, from where a down would open. Since E begins the expanding phase of the Bow-Tie Diametric, it would break below Dec11 lows. The 1 and 3 inside c of D continued for about 4-5 weeks each. We expected 5 to consume a similar time, and end somewhere in the month of Dec12 or near to it.
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As the beginning part of 5 shows violence on upside, 5 could develop internally as a 1 Extension Impulse or Te Since a Terminal always occurs at major turning point, it would be able to generate the necessary downside power for the E leg.

In a 7-legged Bow-Tie shaped Diametric, one can see a reduction in magnitude from A leg to D leg. The D leg is t smallest segment of the Bow-Tie shaped Diametric.

The other half of this Diametric, i.e. E-F-G legs, should show expanding magnitudes, and therefore, E should becom larger than the D leg. This can happen only when E breaks the bottom Dec2011.

After breaking the 14-month long channeled C (from Nov10 to Dec11), we had suspected that development post Dec11 potential to be marked as D leg of a much larger Triangle or Diametric from 2008. This option was preferable because C leg from Nov10 was not an Impulse. A Non-impulsive C leg could only be part larger Triangle or Diametric.
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Inside D, b corrected a by 80% price-wise, and by 161.8% time-wise. From 4 Jun low of 15749 (Nifty 4770), Se assumed to be forming c of the Flat, which should be the last Impulsive wave of a 3-3-5 structure inside the Flat.
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Since the 1 leg looked strong, it was argued that the 5 of c could develop as a 1 Extension Impulse, where rallies wou th th nd smaller. It was also said that 5 of c could even develop as a Terminal Impulse, if its 4 overlaps the area covered by 2 . see.
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If we are currently dealing with only 1 and 2 legs inside 5 of c, the larger 5 of c may stretch itself into next month. A argued, since 2000, most tops occurred during Dec-Mar period. The final confirmation that 5 of c, and therefore the D leg is over would require faster drop below 18255 (Nifty 5548 ), as NEoWave requirements.
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Yearly lows Sensex has broken 2010 low of 15652, and now in 2012 is found holding the 2011 low of 15136.

As the past instances would show, once the yearly low gets broken, a minimum of 20% cut from the low has been phenomenon, though gradually. A 20% magnitude reduced from 15652 would calculate to about 12500 for Sensex. This level has not been touched so far, but should be remembered as a crucial level which matches with the huge action (refer to the Weekly chart discussing 32-week cycle) seen during the 2009.

32-Week time cycle The development since Mar09 has followed a 32-week time cycle, as shown on the chart below.

This was used for raising a possibility that an important low would be formed around 20 Aug11. Sensex respond th hitting the bottom on 26 Aug.

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This cycle had also raised the possibility of an upward/sideways phase that could survive for 32 weeks from Aug1 th st end either on 4 Feb12 or 31 Mar12, developing as a ranged movement like the Left Shoulder. The upward phase during Feb12 as per this cycle.

Going by the structural possibilities from this cycle, it was suspected that Sensex could be forming an e leg of a pos Extracting Triangle, which would remain smaller than the c leg. The e leg did remain smaller as suspected.

As we already know, Extracting Triangle is a pattern which shows smaller rallies and bigger drops. Thus in one direc shows e < c < a, and in the opposite direction, it shows d > b.

Above 18000, Right Shoulder became bigger that the Left Shoulder, which appeared rejecting the Head & shoulder Extracting Triangle argument. However, the 32-week time cycle may remain valid as a cycle even from here.

The Sensex was seen testing the Neckline shown on the chart, which did prove crucial, as Sensex bounced seve times from the Neckline.

Another idea would be to mark the entire development as a Diametric, instead of Extracting Triangle, and the same now marked on the chart. These assumptions indicate an incomplete B, but confirms only on faster drop below th Neckline, which is still awaited.
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The week ended 9 Nov, however, completed the 32-week cycle, and Index has reacted as per this cycle. That rais

question whether the upward cycle is now over as per 32-week cycle.

30% Principle

All major tops are characterized by 30% drop from the top value. This is normal not only inside a bear phase, but i commonly seen even inside a bull phase too. The 30% taken out from the current top value on Sensex (21109) wou less than 14800.

The total loss so far, from the high of 21109 to 15425, measures around 28% so far . However, on BSE Small-Cap an MidCap Index, the loss from 2010 high does measure more than 30% .

Overall, it was argued much earlier, that we would see a topping formation spread over 2-3 month period beginnin Oct10. This played out well as suspected. Indeed, as was observed, 60% of stocks topped out during Oct10 itsel many have already shaved off much more than 30%, though Sensex itself shaved off only 28%.

Comparison with Jan'08 top formation

We compared the 2010 topping formation to the movement from Oct07 to Jan08 , a 2.5 month period just before th of 21206 was hit on Sensex. This was also an extremely volatile period of nearly two months, just before the market ac topped out.

The following chart of 2008 period shows two equidistant parallel channels. The Sensex broke above the original c

and achieved an equidistant height at the upper parallel, before reacting lower into a bear phase.

One may observe the volatile development once it reached closer to the upper parallel. Inside this volatility, the market face th number of sell-offs beginning Oct07, before it finally topped on 8 Jan08.

A similarity can be drawn for the 2010 top formation with the developments of 2008, as shown below. Sensex was testing the lower Blue parallel, from where it bounced recently. It is now trading above the Blue parallel, retesting i

2450-point Grid chart for the Sensex

Sensex has been following a Grid of 2450-2500 points since 2008. These Grids are shown on the Weekly chart of Sen below. One can find a bottom or a top getting formed at each of the Grid levels. Though the Grid level around 15300 did prove support lately, Index is now breaking the 17800 grid level.

Our markets, remember, has seen multifold rallies previously, each time continuing for about 4 (four) years, after wh usually enters a multi-year consolidation phase. In other words, long-term has always meant 4 years in Indian co

Remember, Sensex rallied 11-fold from 390 (Mar88) to 4546 (Apr92) in four years, after which it consolidated for 11 ye from 1992 to 2003.

In 2008, it completed another 4-year rally from 2003, during which Sensex rose 7-fold from 3000 levels to 21000. I now consolidate for 7 year, beginning 2008, preferably forming as a Triangle or Diametric.

We explained that the 14-month fall from Jan08 was a Triple Combination A leg of a large multi -year consolidati corrective phase beginning Mar09 retraced about 99% of the previous fall from 21206 (Jan09) to 8867 (Mar09), (wh labeled as a Triple Combination). The longer time required while rallying is symptomatic of its corrective label o f B

The rally from 8047 (actually beginning at 8867) was, therefore, considered as the B leg. The next leg downwards nd be labeled as C. Such a-b-c development since Jan08 would be considered part of the 2 wave of what appears probable Terminal beginning 2003.

Even though we saw the market reaching levels above Jan08 highs, the multi -year consolidation is expected to sh like a large decade-long Diametric, looking similar to the consolidation we saw from 1992 to 2003. Our trading/investm strategies should be designed accordingly.
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The suspected corrective phase beginning Jan08 would be the 2 wave within the larger 5 wave. This 5 wave is st suspected to be forming as a Terminal due to absence of impulsive behavior in its internal 1 wave. The Terminal c when the Sensex drops below the 2-4 line of one higher degree.

One may see the Yearly chart in Appendix, which shows the 2-4 line and its values for the next three years. Remember, Te development usually violates the 2-4 line.

The Sensex is assumed to be under the influence of a large 8-year cycle ever since its birth. As shown on the chart below, was the beginning of 8-year long bull-run till '1992. In our Super-Cycle Degree count, shown on ASA Long-Term chart u separate paragraph, weve considered 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 poin marked by stock market scams, because of which, the leaders of the rally had extremely difficult time later. For example, A leading stock of '1992 bull market, remained below its highs till end of '2004. Similarly, the IT stocks, which were leaders of rally, lost as much as 90% of their top valuations by the year '2003. During 2008, we were sitting on this very important cycle, which therefore, threw up similar possibilities.

In the previous 8-year cycle top during 1992, Sensex lost 57% from 4546 to 1980. In the next cycle top, the cut was alm 58% from 6150 in 2000 to 2594 in 2001.

We had, accordingly, targeted sub-10k levels for Sensex price-wise during 2008-09, and a minimum of 13 months into phase, time-wise. The price-time targets were achieved as Sensex dropped 63% from 21206 to 7697. The yearly channel, below, which was used earlier to project 20000 level for the Sensex during 2007, was broken when the Index moved below Break of this long-term channel also weighed in favor of a larger corrective phase following this 8-year cycle.

Appendix : Long-term scenarios for Sensex As for the larger-degree wave-scenarios, I consider two alternatives :

The first one assumes that a large Triple Combination corrective, beginning Sep'1994 got over in Oct'2005 at 7656. The las corrective within this Complex Corrective phase formed as a "Non-Limiting" Running Triangle. This has been my preferred scenario for many years, which I had assumed to be under development since I began long-term forecasting during 1997st This one was the basis of Forecast for the 21 Century article published in Business Standard (which can be read on vivekpatil.com).

This scenario also combines well with the traditional channeling technique. Sensex followed a parallel channel for 11 long y 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 g 20000 as the minimum target. This forecast was achieved. This scenario is shown on the chart given below :

As per my second alternative, a Super-Cycle-Degree 3 (or 5 ) began since Nov84. Its internal 3 was an extended leg, st th achieved exactly 261.8% ratio to the 1 on log scale. The Sensex is now forming its 5 Wave, and the same is likely to dev st a Terminal, because its lower-degree 1 wave since May03 developed as a Diametric (a corrective structure rather than impulse).

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Within the non-directional legs, 2nd was exactly 61.8% of 1st value-wise, and 161.8% time-wise. The 4th was 38.2% of 3rd wise, and 261.8% time-wise, as shown below.
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Since the 5 is now more than 61.8% of 3 , it may lead to a "Double Extension" scenario, wherein both 3rd as well as 5th w be extended waves. This scenario is shown on the the chart given below :

Development from May03 is a 7-legged Diametric formation, marked as a-b-c-d-e-f-g. It is called "Diametric" because it co two Triangular patterns, one initially Contracting up to the "d" leg, followed by an Expanding one. The contraction point i leg, and the legs on either sides of it tend to be equal. Accordingly, "c" and "e" were equal in "log scale", both showing abou gains. Similarly, "g" was equal to "a", both showing about 115% gain.

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The Diametric development from 2003 to 2008 has been considered as the 1st of the 5 . Due to the corrective structure in th leg, larger 5 could be developing as a Terminal. Since 2008, we are into its 2nd wave, which could continue to develop ov years from 2008. The "Double Extension" scenario was also shown on following ASA Long-term Index (chart below). I've created this chart combining Index compiled by a British advisor (from '1938 to '1945), RBI Index ('1945 to '1969), F.E Index ('1969 to '1980) Sensex (thereafter till date).

The wave-count presented on ASA Long-term Index favors the alternate wave-scenario discussed above. The labels show rd th market is into the lower-degree 5th of the SC-degree 3 or 5 wave. If a "Double Extension" unfolds, Sensex could be proje achieve even 50000+.
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A break of 2-4 line would confirm the Terminal development inside the 5 , and would therefore, restrict the upsides to much levels than 50K, but end surely above 21000.
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If the 5 proves to be a Terminal, one larger-degree label of 3 will have to change to 5 , because only a 5 of the st rd rd th be a Terminal. The Super-Cycle-Degree marking for 1 and 3 shown, would then change to 3 and 4 respectivel shown in White.

Disclaimer : These notes/comments have been prepared solely to educate those who are interested in the useful applicatio Technical Analysis. While due care has been taken in preparing these notes/comments, no responsibility can be or is assu any consequences resulting out of acting on them.