The Sensex had bounced back from near to our target area of 12.4k. The sharp recovery (that to) from the technically important area could be an indication of the revival of the trend, at least in the medium term.
The recent fall from 17735 had consumed 10 weeks. Being corrective rally to that fall, the current rally could last more than 10 weeks As such the recovery could be “slow” & “complex” affair rather than a straight upward rally. See chart for earlier corrective phases, the corrective rallies were consumed more time than the time taken for the corresponding down moves.
As such buying on sharp cuts rather than sharp rallies would be a more profitable strategy in the near future. In the immediate short term close above 13750 is must to continue the bullish momentum of the last 2 trading sessions. If failed to surpass 13750(close), immediately, expect a retest of 13k levels once again & that could be an idle opportunity for the bulls to form long positions. On the upside, the Sensex has to clear previous hurdle (Gap down) area of 14127-14197 and then 14520 for sustainable rally in the near future.
In short, after taking hit of over 29% since May 08(17735), the Sensex has stabilized near 12.5-12.8k area. Our proprietary tools suggest continuation of the fall from current level is unlikely & market is ripe for corrective rally. We have already witnessed bullish action, as a part of corrective structure, in the last 2 trading sessions. Position your trades accordingly.
In the alert note (4th July -13094) I said” the huge volatility and sharp swings indicates a short term reversal is on the cards.” Consequently, we witnessed a swift move towards 14066 i.e. rally of almost 1000 points when (due to negative “news flow) the ‘street’ expectations were otherwise. Interestingly the corrective uptrend exhausted near to the “technical” hurdle levels of 14127-14197.
Friday’s sharp reversal from technically important territory has once again reaffirmed the prevailing structural weakness in the market. The same is likely to continue or even aggravated once the Sensex dips below 12820-12600 area.
In the last 48 trading sessions, the Sensex had lost over 4900 points i.e. 27.7% (from 17735 to 12822). The initial leg of the bearish trend, i.e. 21206 to 15332 (Jan 08), was also exactly 27.7%. However, after this initial fall(in Jan 08), the bulls made several attempts to regain the control and the Sensex witnessed corrective rally towards 18k+ levels(Feb 08), before resuming fresh down trend. Now, once again the Sensex had shaved off exactly 27.7%, is it a time for corrective rally?
May be! But for this the bulls need to accomplish difficult conditions such as a) Not to fall much below 12.8k levels; & b) Close above 13670-690 area. If succeeds, then expect a “time” consuming up move towards initial hurdle of 14127-14197, then 14520-14645.
Else, the continuation of a swift down move towards 12.8 to 12.4k in the next few trading sessions. Position your trades accordingly.
SSEC (Shanghai) (2856): In recovery mode…
Intermediate trend: Bearish
Nikkei (13039): Down move intact…
Intermediate trend: Bearish
Dow Jones (11100): Watch 11230…for recovery
Intermediate trend: Bearish
Brazil Bovespa (65017)
Intermediate trend: Bearish
Last week, on the daily charts, the Sensex made few positive attempts to recover, near the lower end of the parallel channel, but failed to achieve 14510 for sustained recovery. Adding insult to the injury, yesterday's price action has breached the parallel channel downwards, which could aggravate the "fear" factor, further.
On 27th June (Friday) the Sensex created, yet another, "falling gap" near 14197-14127 area, thereby creating a new 'hurdle' area in the near term. If managed to fill up this gap completely (close above 14197), then (only) expect a corrective rally.
On the Weekly charts, suspected Head & Shoulder bearish reversal pattern, is now became reality. On the downside expect 12316. After an initial break, throwback action (pullback) is expected. However 14197, as discussed earlier, is the key point for such corrective rally. If happened, then expect 14519 or even retest of 15.3k in the medium term, within the overall bearish structure.
See yearly chart. 
The Sensex is trading below the 'open' of the year 2007, i.e. completely eroding last year’s gains. Baring the fall in the year 1995, where the Sensex had completely wiped out the gains made in the year 1994, the Sensex had never fallen with similar magnitude. The bad news is not ended here; after 1995 fall, the Sensex witnessed prolong sideways movements before attempting a new high. If the current situation unfolds (we are just half way in the year 2008) in a somewhat similar (to the previous one) fashion, then the dream of a new high for the Sensex will be a time consuming affair (large trading swings).
FTSE (5625) Intermediate trend: Bearish
FTSE has ended the corrective up move at 6377 and started a fresh downtrend. However, after achieving 5470 it has witnessed a sharp rebound at current level.
I suspect this recovery is a part of overall bearish structure and not a fresh up move. The rise beyond 5690-5710 area looks doubtful. If failed to surpass these levels, possibility of retesting of Jan 08 low of 5338 is bright.
Dow Jones (11350) Intermediate trend: Bearish
It was said” the Dow has retraced the previous leg (11700-13200) in faster time, confirming (2nd stage) the larger degree weakness; near term target is placed at 11640 & 11550.
In the previous report (13th May -13953), I said, expect a continuation of the uptrend till 14390; stop for the bulls is placed at 13620.
Since then, the index has managed to float above the stop of 13620(even today) while achieving high of 14601, as against target of 14390.However; the trading is confined to a 'narrow’ range of 13700-14400 for quite some time. Now this standoff is likely to get resolved in the near future, may be in favor of the bears.
It seems that the bulls are loosing control over the market after a sharp rise of over 23% since Mar lows. The weakness is also evident from the faster retracement of the last segment (13810-14469)-see chart. The upside is caped at 14300; while on the downside 13620 will be crucial, once broken, expect 12858.
The index has reversed the trend with classic “Head & shoulder” reversal pattern (monthly charts), and lost over 56% since Oct 07.
The reversal in the trend is unlikely in the near future, and it may drift towards a "possible" stoppage area of 2250-2200 i.e. previous significant top achieved in June 2001.
For the extreme short term trend, a close above 2945-55 is must, if done (difficult task); expect a trading bounce towards 3200 region.
In the previous review (Dow was at 12307), I said (previous review)"the intermediate trend is down; the trading is still confined to falling parallel channel; as long as it trades below 12370 the downtrend will persist and will retest the 12k levels.
Dow made a low of 11819.So far the falling channel is intact, resultant continuation of the downtrend. Now revise stop to 12085(close) from earlier 12370;if seen, expect a spike(corrective) towards 12200-12250 region.
From the medium term perspective, the Dow has already given "faster retracement" of the previous intermediate uptrend (11700 to 13200) on weekly "close" charts. This is a second stage confirmation of a larger degree weakness. First stage confirmation was failure to close above 13.2k (see past reports). On the downside, our near term target is placed at 11640-11550.
The faste
r retracement of previous really (14677-17735) has given its implications with a drastic fall below
the crucial trend deciding zone of 15332, decisively. Since the beginning of the bearish trend in Jan 08, we had witnessed sharp rallies from this level; now it will act as a “major” hurdle for the bulls, due to change of polarity concept. (Support turning into resistance).
As discussed in previous reviews (5th & 25th March), since 2003 (start of the bullish trend) the Sensex has observed “May-bottom” cycle with 30-32% fall occurring at every alternate year (2004 & 2006). In the present fall, the Sensex has broken this phenomenon, resultant a “structural” change after a strong bulls run from May 03-Jan08 of over 18k points rally.
For the intermediate trend, the recent “break away” gap at 15789-15259 will be a major hurdle for the bulls. Previous (such) gaps created on 16th Jan 08 (20203-20079) & on 6th Feb 08 (18509-18274) remains “uncovered”, even today. Hence, considering the overall weakness in the trend, this recent falling gap will be a “major” hurdle for the bulls. In short, till 15789 seen (difficult task), the intermediate trend will remain bearish.
For the near term, the Sensex may give trading bounce if “close above 14510”. This behavior will be in line with usual tendency of markets to do “least expected” moves (i.e. contra moves to that of popular perception). If it does gives a rally (corrective) then expect a rise up to 14750 or 14890.
As a matter of principle, technical analyst studies/reveals the “effects” of price movements, while “fundamental” analyst goes for “causes” of the price movements. The answers for “why (i.e. causes) could be many and will be deceptive or ambiguous; but the answer for “what” (i.e. effects) will be precise and tradeable. It’s all started with “sub-prime”, then “derivative trades, then “inflation” and now “political uncertainty”; after few thousand points fall, the reason would differ, almost certainly.
By rule, faster retracement indicates a significant top has been created at 17735. The larger degree uptrend is ruled out till this level is surpassed.
On the daily charts, the Sensex has exactly bounced back from the lower end of the parallel channel (see chart) and seen recovery attempts by the bulls. Near the lower end of the channel the “street” was nervous and seldom thought of recovery, but it happened, as the market has a penchant of making deceptive moves. Since then, in a corrective up move, so far, the Sensex has gained over 900 points. There could be further positive attempt by the bulls but for that the Sensex needs to close & sustained above 15553, i.e. yesterday’s high.
If it does, then expect continuation of the corrective rally till 15770-15950 seen. If it fails to sustain above 15553, then expect a range trading in 15500-15180 area for a while before deciding future course of action.
For the long term trend, as discussed in the above Para, 17735 is a ‘roof’. On the downside 14300-14500 area is likely to act as a ‘last resort’ for the bulls. If the Sensex drops below 14260, the possibility of extracting triangle will be ruled out and further downside will be opened, towards the target objective of 13779 or even 12316. Trade accordingly.
In the previous review (Dow was at 12876) on 13th May, I said “The Dow has touched 13191 as against our target of 13200 & once again fallen back in a trading range of 12700-13000; Is it an end of the corrective rally started from Mar low? The answer lies in breaking of resistance zone of 13190-13220, if failed to do so, the downside till 12200-12050 looks certain”.
Within the next 4 trading sessions, more precisely on 19th May, the Dow had attempted to break the resistance zone of 13190-13200. However, it could achieved only 13137 and given up. Since then it has moved down, slowly and steadily, and seen 12029 on 11th June 2008; exactly on our target i.e. 12050.
Near term view: At present, the trading is still confined to falling channel. (See chart). As long as the Dow is trading below 12370, highest value of the channel, the current downtrend will persist, may be retest of 12k is possible. If broken above 12370, expect recovery efforts till 12602.
Major Indices : Sensex : 15066
Nifty : 4500
Intermediate Trend: Bearish – Stop 16632
Key Technical Levels : 15970- on the upside, 14846- on the downside
Target achieved:
It was said – in the previous review- “markets are likely to continue the downtrend started from 17.7k till 15.3k is achieved; it could be a last down move of the fall started from 21206; it’s difficult to anticipate weakness below 15.3k levels; if it happens the situation will be aggravated further & it will be another indication that “all the negatives” are not yet factored into the price; on the upside close above 16626 is must for revival”.
The Sensex achieved 15.3k but it went below the threshold to 14846, i.e. just 165 points away from the low achieved on 18th Mar 08. This action, i.e. not breaching the previous low of 14677, despite of absolute bearish grip, has added more confusion in already timid situation. Is it really a last down move?
Although the Sensex has averted the situation of a new low, as of now, and recover more than 1.5% from the intraday low, it needs to be bounce back above 15812-15976 area, quickly , to confirm the “presence” of the bulls (strong hands), if not a automatic reversal in the trend. The reasons for this positive bias on the markets, in the near term (short term), despite of strong bearish sentiments are
i) Sensex formed bullish “hammer” pattern on the Candlestick chart, suggests “rejection” at lower levels; however it need to trade above 15000 levels consistently to have bullish implication of this pattern. But failure to do so will open further downside.
ii)Falling “gap” created (yesterday) in the area of 15526-15502; such a huge gap down price action that too after a consistent fall (from 17.7k) might turned out to be a “exhaustion” gap i.e. end in the previous minor trend. Hence the bulls must attempt to close this gap on close basis i.e. a close above 15526.
iii) Our proprietary tools indicates a recovery (may be short term) in the Sensex once it “closes” above the 15202 i.e. yesterday’s high.
As far as the long term structure of the market is concern, here are the key technical observations which suggest “it’s not all over”, yet, for the bulls.
a) We suspect a Contracting triangle formation on the charts beginning 21206. Triangle is a 5 wave pattern- 3 legs in the direction of the trend & 2 legs in opposite directional of the trend. See the chart. Accordingly we are likely to be in the last wave i.e. “e” wave. First down move “a” (from 21206-15332) was of 5866 points; the second down move “c” was of 3450 points (from 18137-14677) and the current move “e” has so far consumed 2883 points. This reduction in the magnitude of the fall in each leg (5866-3450- 2883) indicates a contraction/loss of power. However “e” leg, if not ended near 14677, should not fall below 14260 to maintain the fall less than 3450 points. On the upside, the Sensex needs to cross the b-d line (present value near about 17.5k) to confirm the positive attempts in the direction of an upward breakout.
b) On the monthly chart, the Sensex had invariably taken the support at previous “high” of each intermediate up move. See the monthly chart. The previous high (Feb 2007) is at 14723. Since the Jan 08 low, the Sensex has averted the fall below this level, thereby maintaining the long term bullish structure.
.GIF)
c) As discussed earlier (ref 25th March report on the Sensex), sharp cuts of 30-32% on the Sensex, every alternate year, is a common phenomena, so far since the beginning of the present bull run in 2003. As long as Sensex maintain itself above, say, 14500 area, the bullish structure is maintained.
Conclusion: As anticipated, 3 weeks back, the Sensex has achieved our target (down) of 15.3. But a close below this threshold level has raised several doubts for the “reversal” in the bearish trend started from 21206. We will continue to hold out cash positions till the Sensex gives confirm bullish reversal. A close above yesterday’s high of 15202 will be the first indication of a short term recovery. If the bulls able to “fill” up the gap down area of 15526, we can expect a meaningful recovery towards a confirmation of “e” wave.
Bearish Scenario: If the Sensex continues its downtrend even below the yesterday’s low, then the recovery is least expected. In such case expect a dip up to previous low of 14677 or even 14500 in a next few trading sessions. Once the Sensex starts trading below 14500, the more serious downside, price wise as well as time wise, will be opened and the next immediate target will be 13779 and then 12316 (Feb 07 low). All the major sector indices are trading below their respective lows of Mar 08, indicating a gravity of the situation. On the stock specific front the situation is worse and almost all the leading stocks in Banking, Capital Goods, Reality, Power sectors are trading almost 60% down from their Jan 08 levels.
Failure to move quickly above 15.8-16k levels in the near term, or even by month end (which is also a quarter end), may severely damage/alter the long term equitation’s on the monthly/quarterly charts. In such a case, I suspect a Head and Shoulder bearish reversal pattern will emerge which would lead to a fall even below 10k in the Sensex in the next 3-4 quarters.
However, even if this scenario unfolds, the Sensex is unlikely to fall in a straight line. It may provide number of short term rallies thereby giving ample opportunities to trade. Position your trading/investment positions accordingly.
Overall, the bulls are on the verge of collapse, after a spectacular rise from 2900 in May 03. There could be a bitter battle between the bulls and the bears, in the next few trading sessions, simply for the survival. It is very unlikely that such a major shift (on the either side) will happen so easily. Actions of the strong hands (institutions/ informed big players) will be crucial for deciding the direction/trend of the market. As such, smaller hands can keep themselves away from the markets till the things get resolved. Aggressive investment buying (trading is permitted) just because of 60% fall in the value will be a trap if the Sensex falls into the next bearish cycle. Remember, the price discounts “everything” well in advance, as such the worst “fundamental” news/shocks will be an excellent opportunity for the long term “base/bottom” formations, but when it will happen is the million dollar question.
.GIF)
