TECHNICAL OVERVIEW OF THE MARKETS...SENT TO CLIENTS

TECHNICAL OVERVIEW FOR THE MARKETS

Sensex down 4.25% exactly from the "Island" area, now retesting crucial 200-day EMA

Last week I noted the ongoing positive efforts as another attempt to hold various crucial downsides, including 200-day EMA and previous lower shadow. At the same time, I also pointed out that "On the upper side ... the resistances are now placed at the Island area ... Next week, Index may slow down a bit as it moves closer to the " Island " area at 18274-18439 ... As a result of this, immediate bullish expectation should be reined in for the time being ..."

Initially up only 200 points, Sensex touched 18314, which was at the "Island" area. Getting resisted exactly at the suspected resistance level, Index lost over 1000 points during the rest of the week. The net close was down 766 points or 4.25% lower for the week

The facts on hand are indicating reducing tendency for each successive leg within the current corrective phase so far.

While on the downside we saw support initially coming in at "e" of Running Triangle, and 200-day EMA thereafter, the upper side has seen technical resistances performing exactly as expected.

The initial 8-day fall from 10th Jan high of 21206 to the low of 15332 was corrected almost exactly to the extent of 61.8% of fall, which is a Fibonacci Ratio. The Index, however, created an "Island" at that level, which is a bearish pattern, and weakened once again. Though the second round of losses remained smaller than the first one, the Island area proved a tough resistance for the rally thereafter

the structure shows following features : One, the May-Bottom and 8-year cycles, discussed separately, have kept their pressure on positive efforts. Two, the sideways contracting action from the low on 22nd Jan'08 completed 21 days last week, which a Fibonacci time ratio of 2.618 to the initial 8-day fall. Three, Sensex is still showing lower tops on the upside. Four, all the falling gaps remain uncovered on the Daily as well as Weekly time-frame. Even the small 11-point Weekly downward gap created on 21st Jan at 18919-18930 has remained unfilled for more than a month. This was followed by an Island gap-down. Five, on the lower side, efforts are seen to hold previous low and 200-day EMA level. The lows are also close to the monthly/yearly base-lines

What will, then, break this jinx ? Only a "full and faster" retracement of any segment. Until that happens, the odds would favor volatile fight between bulls and bears.

With last week's loss, Index is now re-testing its 200-day EMA which is at about 17250 level, and the same is also close to previous week's gap-up area at 17141-17265. These are crucial levels technically. In the coming week, can we see some arresting tendency, as the Index moves closer to these crucial levels ?

Arresting tendency will need the Index to bounce back strongly, and “sustain” above 17526, which was Friday's high. That could be positive at least initially during the week. Failure to do that would, on the other hand, open possibility of retesting of previous low at 16457. A faster retracment below 16457 would confirm the larger weakness, leading to further severe downsides

Based on the May-bottom cycle, I had already argued that “Time-wise, this cycle may keep the market under pressure till at least Apr-May of this year …” If, by May, Index holds the downsides closer to its 200-day EMA, then May-Bottom Cycle would open upsides for the Market.

On the other hand, failure to hold the lower range anytime hereafter, could push the Index dangerously into the bigger 8-year Cycle, which I have explained separately. As I warned already, "The monthly and yearly support lines would get broken below these levels, and could indicate end of the 57-month bull-run."

Remember, the Sensex, at Jan'08 low of 15332, has already lost 28%, which is a usual phenomenon every two years, even during the current bull phase. In ‘2004, it lost 32% from 6250 to 4227. In ‘2006, it lost 31% from 12671 to 8799.

The bigger, 8-year cycle, however, calls for a much bigger, 55% cut, every 8 years. In ‘1992, Index lost 57% from 4546 to 1980. In ‘2000, it lost 58% from 6150 to 2594.

We’ll see if and when the 8-year cycle takes over, and take that call by May.

The values on the Yearly Channel for '2008 year would also be about 17200-500 on lower side and 28200 on the upper side. The Sensex has now dropped below the channel, though marginally, showing thankfully a long lower shadow on the candle as it hit 15332.

The current bull-phase is now more than four years old, wherein Sensex multiplied 7 times from 2904 (May'03) to 21206 (Jan'08).

Cycle studies indicate Sensex' tendency to hit a high in the first quarter every year during this bull run, and low near every May. Since we already have an important top in 'Jan this year, we may look for a bottom in coming Apr-May in line with this cycle study. The low at 15332 hits the trend line joining May'2004 and Jun'2006 lows, which the Index is desperately attempting to hold.

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 it 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.

After ending the previous corrective phase from Sep'94 to Oct'05 with a Running Triangle at 7656 level, Sensex broke out to 12671 (May'2006).This breakout was larger than the largest leg of the Running Triangle.

The development post-12671 was again observed as forming a Running Triangle, inside of which, the "a", "c" and "e" legs showed some violent cuts, magnitude of which, however, reduced gradually from a to c, and then from c to e. Such a reduction of magnitude gave the contracting shape to the Triangle, as I had suspected.

Based on this Running Triangle assumption, I had argued that "... deep cuts, like we saw from 14723 to 12316 and from 15868 to 13779 recently, are indicative of 'bull' phase, and market has recovered from such deep cuts, time and again, and in fact surged to new high levels during the last four years."

Index did what was suspected, and made it to a new high. I had argued that "Such a development of Running Triangle would be supportive of my preferred bullish count discussed elsewhere."

Talking of pattern-implication, it may be noted that the latest Running Triangle from 12671 onwards is a limiting one, with a minimum pattern implication of 75-100% relative to the largest leg of the Triangle. This has been achieved already.

I had, however, said that "a breakout from Running Triangle usually achieves a magnitude equal to 161.8% of the largest leg. For Sensex, "b" leg begins either from 8799 or 9875, ending at 14723 (top in Feb'2007). Even on arithmetic scale, the 161.8% magnitude will calculate to an amazing 21600 or 23300, depending on the starting point.

Time-wise, such a pattern implication should be achieved before the apex-point. On the monthly chart, the Apex time is in Jan-Feb'2008

Projections based on log-scale would calculate to much higher levels of 26200 or 31600, again depending on whether you start the "b" leg, at 9875 or 8799.

The Sensex's recent low at 15332 hits the "e" of this Running Triangle exactly.

The idea and design for the Running Triangle and its breakout implications had been compared to the Dow chart scenario after Oct'87 fall. Dow’s picture has been reproduced below for easy reference. Breakouts from Running Triangles are usually powerful.

Since a long time, 13300 level (on Sensex) was explained to be 61.8% log-scale ratio to the previous Sensex rally (3rd wave, according to the Alternative Wave-Count) from 390 to 4546.

This level has been described as the crucial wave-count decider between the preferred bullish scenario (Breakout from Running Triangle) and alternative bearish scenario (under which the 5th wave is about to end). It was said that “Our preferred scenario wins if the Sensex is able to sustain well above 13300 ... ”

Talking of the traditional channeling techniques, the channels, which I had shown on the Weekly Log-Scale chart of Sensex since over a year ago, have been proving perfect guide-lines, as can be seen from the closer examination of the chart given below.

The recent low at 13779 broke the Blue channel, but held the White channel which was at 13500. The Blue channel proved a strong support for the consolidation which was seen before the US-Fed-rate-cut recently. Our target of 20000 was exactly on the upper Blue channel. The most recent tops were hitting the lower Red channel, and Sensex has reacted quite strongly from there. The recent low at 15332 was made near the lower White channel. For the last two weeks, the resistance came in exactly at the Blue channel.

Remember, these channels were drawn last year. It is indeed amazing to see how the same channels have guided the Sensex movement for over a year.

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. 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. (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 also gave 20000 as the minimum target. The same has now been achieved.

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 of the impulse 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 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, where 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 more than 61.8%, except for the new pattern called "Diametric"). 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 a 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" would be equal to "a", both showing about 115% gain. Under "Double Extension" scenario, this Diametric could be taken as the 1st of the 5th, which, due to its corrective structure, could be developing as a Terminal wave.

Recent strong moves have gone in favor of Bullish scenario of "Breakout from Running Triangle".

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 "Double Extension", Sensex could be projected to achieve even 50000+.