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Short Term Analysis

In my last post, I discussed about bulls being trapped near the high of 6229 on the NIFTY. That turned out to be true and wave (a) from 5500 to 6229 was followed by a severe correction (almost 100%) in form of wave (b). Wave (b) seems to be a diametric formation that ended on 26th June 2013. Wave (c) is in progress thereafter.

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Waves (a) and (b) being similar in price and even time, wave (c) may become a terminal impulse pattern consuming substantial time of about 10 weeks (time of a and b put together). This entire structure then would probably become a FLAT pattern enclosed by the white channel shown.

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Eventhough wave (c) has started with a big bang covering 300 points on the NIFTY in just 3 days it would probably fizzle out. But since wave (c) is expected to be TIME consuming (than PRICE) the non-index stocks (mid-caps and small-caps) may outperform in the next few weeks.

In my last post on 17th May, I had mentioned about the possibility of a bull trap developing on the NIFTY charts. The failure of the indices to rally further for the last two weeks and the continued hesitation at the trend line shown in the chart confirms such a trap.

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On having a closer look at the NIFTY daily chart wave ‘e’ (and consequently wave ‘D’) looks incomplete. The wave seems to be sub dividing and we possibly are in part (b) of this wave. The entire wave ‘e’ that began at 5500 on the NIFTY may subdivide as a-b-c or a-b-c-d-e.

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We remain cautious at this point since there has been a faster retracement of the upmove 5970-6229 during the fall 6229-5936. As per wave theory the pattern looks incomplete at the top, but such things can occur at the major turning points.

Anyway even if the wave developes into an a-b-c pattern, then there is still some steam left in the rally.

But then that would become an even worser TRAP !!

NIFTY achieved its first target of 6150 this week, as discussed in my last post. The movement is still too simple i.e. too swift to indicate any topping formation. I still continue with my assumption that the ongoing rally is ‘e’ wave of a Neutral Triangle that began in January 2012.

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The wave has yet not shown any loss of momentum eventhough stochastically the market is overbought on Daily as well as Weekly time frames. Anyway the market is not bothered about that.

Now let us observe the same chart from a different perspective.

The current rally (wave e) has completely retraced the fall (wave d) in much shorter time. Such an action usually begins a new wave. Then is the consolidation phase from Jan 2008 over and is the market entering a NEW BULL PHASE ? Many may think and even wish that to happen. But if you observe the larger wave ‘D’ has taken more time than wave ‘C’ and has not yet retraced it completely to make a new all-time high.

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Some may argue why not begin the new bull run from the end of wave ‘d’ marked as ‘point 0′.

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Let us observe this rally for the next few weeks. If you observe the red dotted trend line was breached by the market last week. This week also the Nifty has closed above the line but has 50% of its portion is below the trend line. That means the market hesitated at this line. If the market begins a new move there should be no hesitation at all. On the contrary the break occurs violently never to return to the line. This is an important aspect of technical analysis.

In the next one or two weeks, if the index again turns down and breaks the trend line we can be sure that this attention-seeking rally is NOT a New Bull Run but just a NEW Bull Trap !!

The downward Diametric pattern that began on 29th January 2013 did make a bottom at 5477 on the day I published my last write-up but ended at a later date, at higher bottom of 5500. I was expecting the following upmove to be an x-wave that retraces this whole pattern by not more than 61.8%. In that case the rally shouldn’t have crossed 5861 on the NIFTY, but it did. Up till now it has retraced the entire fall by about 70%.

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Consider two aspects:

1)  The rally is violent enough to be mark the commencement of a NEW upward pattern and not a part of the downmove.

2)  The fall from Jan 29 to April 10 is NOT BIGGER than the fall from January – June 2012.

Both these things force me to reconsider my earlier labelling. I feel that wave ‘D’ that began in January 2012 is not yet over. Due to the complexity on the daily chart we observe this on a weekly perspective. It looks like a Neutral Triangle (in which wave ‘c’ is the longest and usually the most complex wave) is developing. We are right now in wave ‘e’ of this triangle.

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Wave ‘c’ being quite complex wave ‘e’ could be around 61.8% – 100% of wave ‘a’.

This sets the target of 6150 – 6500 on the NIFTY in the next 3-4 months.

This view will be negated if the market suddenly reverses and breaches 5477 in the next few weeks.

Nifty confirmed the beginning of a downward wave by falling about 450 points, which is bigger than any intermediate fall during the rally from June 2012 bottom. Thereafter the index has rallied by  almost 300 points in just four days. This confirms that wave ‘a’ of the down-move is complete and wave ‘b’ has begun. This wave ‘b’ could turn out to be a Flat pattern, a Contracting triangle or even a Diametric. Right now, I can only say that the pattern in wave ‘b’ position is likely to be a non-directional one oscillating between two values of NIFTY (5663 and the other yet to be confirmed).

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During my last few posts about NIFTY, many had doubts and queries about the structure I had presented for the entire FLAT pattern (a-b-c) from January 2012 to January 2013, especially the pattern in wave ‘b’ position.

Wave ‘b’ here is a Neutral Triangle having five legs from A to E as shown.

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Neutral triangle being a newly discovered pattern under NEoWave, not much is known about its occurrence in real time charts, especially in Indian markets. I do not know whether it can occur as wave b of a FLAT pattern, but I am assuming so. Since the pattern terminates at a much higher level (5217) instead of 4770, my only requirement was a swift and violent break-out crossing the top of the triangle (5630). Since that has actually taken place as wave 1 of wave ‘c’, I am assuming that my interpretation is fine.

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As per NEoWave theory, FLAT pattern is the only place where wave b can consume substantially more time than wave a. According to Glenn Neely, time of wave b could go up to 5-6 times that of wave a. In the above mentioned FLAT pattern, wave ‘a’ has taken 30 days and wave ‘b’ has consumed 137 days. In such a case wave ‘c’ must take at least about half the time of a and b combined i.e. 84 days. In our chart wave ‘c’ has taken 98 days to complete.

If wave ‘c’ is assumed to begin at 4770 instead of 5215 then several important rules like extension rule, touch point rule have to be broken. In general, I am not in favour of breaking any rule.

One more aspect of the post impulse behaviour is that the 2-4 trend line is broken vilolently by the market confirming end of an impulse pattern. This is not observed during the recent fall of NIFTY if wave ‘c’ is assumed to begin from June 2012 bottom.

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It appears now that in the intermediate term we are in wave E of the pattern that began in January 2008. This wave may roughly follow the path shown by the dotted line.

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It remains to be seen whether it falls below 4531 or not in the coming months to decide what the larger picture looks like.

A complete reassessment of the presented pattern would be required if the index makes a new 52 week high (above 6112) in next few weeks. 

NIFTY topped at 6111.80 on 29th January 2013 on a positive but expected RBI policy news and has fallen thereafter by almost 300 points in last 18 days. With this fall we can end wave ‘5’ within wave ‘c’ of the FLAT pattern that began in January 2012. Image

I had mentioned in my last write up that NIFTY should fall below 5865 before 14th February 2013. But NIFTY breached this level on 15th February. When I had a closer look at the intra-day charts, it appears that the terminal impulse wave ‘5’ had begun at 5898 instead and this has been retraced in less than 50% time as shown.

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Hence I am assuming that the terminal wave ‘5’, wave ‘c’ (in five parts 1-2-3-4-5), and the FLAT pattern a-b-c all are over and a new down trend has begun. This will be marked as wave ‘E’ of the larger pattern that began in January 2008.

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We can expect this down trend to continue at least for the next 8-9 months and break 5215 as mentioned in my last post.

A complete i.e. 100% and faster retracement  of an up move in Nifty occurred after the top of 6111.80 on Jan 29, 2013. This probably confirms an intermediate top at this point and also the end of a FLAT pattern that began about an year back in January 2012.

As I have already discussed in my last two posts that the ‘c’ wave of this FLAT pattern was a 1st extension trending impulse within which wave ‘5’ looks like a Terminal Impulse that typically oscillated about the 2-4 trend line.

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We can visualize this in a better way in the following diagram.

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Further to confirm this terminal, NIFTY must fall below the starting point of the terminal i.e. 5865 in 50% time it took to form. That means NIFTY should break this level before 14th Feb. 2013.

As per NEoWave observations, if wave ‘5’ is terminal in an impulse pattern then probably the entire impulse pattern is retraced thereafter. This leads us to a conclusion that, if my interpretation of the index pattern is correct, then NIFTY should even break the level of 5215 in the next few months.

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This fall will eventually mark the beginning of another downward wave that would form the next leg of the huge consolidation pattern that began in January 2008.

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We now continue to follow the market in the coming weeks to find whether its movements justify my stand.

The increasing complexity i.e. the overlapping and subdivided structure of the present rally confirms my view of ‘Bull market losing momentum’ I discussed in my last write-up.

It looks like the index is forming a terminal impulse pattern in wave 5 position. It is clear from the way the market is weakly pushing up that we are close to an intermediate top. We can easily observe that wave 5, instead of moving away from the 2-4 trend line, is oscillating about the line.

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If I remove the price candles from the chart and keep only lines representing the waves then this fact stands out even more distinctly.

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To confirm this view, this slow overlapping rally must end soon forming a market top at least for the time being.

About a month back, in my last post on NIFTY, I had discussed an alternative possibility for the ongoing impulsive wave ‘c’. That alternate count seems to be more appropriate if one has to follow some important rules of NEoWave theory.

One of them is a touch point rule, that says out of the points 0-1-2-3-4-5 in an impulse wave, not more than two points should lie on the same straight line.

Secondly, wave ‘c’ usually can take a maximum time equal to that of wave ‘a’ and wave ‘b’ put together and that too when wave ‘c’ is a terminal impulse.

THIRD most important point is the rule of extension in an impulse. It says that the longest wave in an impulse should be more than 1.618 times the next longest wave.

All these rules have to broken in the first alternative shown below.

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With a shift in the termination point of wave ‘b’, shown below, all these problems disappear. Hence I am considering this to be a more appropriate pattern interpretation.

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Now we find that wave ‘c’ seems to be a proper trending impulse wave with extended wave 1. Further it follows the touch points rule also. It is also showing the characteristic contracting shape of a first extension impulse wave.

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Now the entire FLAT pattern from January 2012 seems to be developing as shown below.

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If this interpretation is correct, then we are very close to an impending top.

In my last post I had mentioned that wave ‘4’ looks unfinished and is about to terminate. It took about 30 days for wave ‘4’ to get over and wave ‘5’ to begin. If this interpretation is correct then this would be last wave and hence the last rally of the current pattern.

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Beginning from January 2012 the pattern thus getting completed is called a FLAT pattern having 3 legs a, b, c. Wave ‘c’ has sub divided in 5 parts 1, 2, 3, 4, 5 of which the last leg wave ‘5’ is in progress.

Alternate Possibility

In a FLAT pattern usually wave ‘a’ is a violent and simple (i.e. not much subdivided) move. Wave ‘b’ is usually time consuming and complex (subdivided). We observe both these characteristics here. Wave c is impulsive and usually takes 50% time of ‘a’ and ‘b’ together. If wave ‘c’ is a terminal impulse it may take time up to that of a+b.

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In the FLAT pattern in progress, we find that wave ,’c’ has already exceeded time of a+b in spite of being a trending impulse. Also point 0, 2 and 4 lie almost on the same straight line which is uncharacteristic of an impulsive wave.

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These things raise a doubt whether wave ‘b’ ended at the point shown or it has ended at a higher bottom shown in the chart below. In that case wave ‘3’ (and not wave ‘5’) of wave ‘c’ is in progress.

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If so,it is possible for wave ‘c’ to continue its progress for a few more weeks.

If not, the current rally in NIFTY is the last one before the impending top.

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