Passing The Parcel

When a trend (bullish or bearish) continues for a long time, everyone believes that it will never end. But it always does. For a certain period, the bulls dominate the market and we see great rallies. Whereas for some other periods, the bears dominate the market and we witness huge crashes. When both are equally strong the market remains in a consolidation phase, in which we are, at the moment. My analysis of the patterns formed by the BSE Sensex based on the Elliot wave theory and Glenn Neely's Neowave theory follows.

The Past

We are in a long consolidation phase, which started in September 1994. It looks like an `irregular failure flat pattern' having the following internal wave structure.

Wave (A): This is a truncated zigzag from 4643 (September 94) to 2820 (January 96) which should almost always be retraced by the next wave of the same degree follows.

Wave (B): This is a running expanding triangle having the following internal structure.

wave (a) : from 2820 (Jan. 96) to 4131 (Jun. 96) has violently retraced a little more than 61.8% of wave (A) in just 25% time showing that it is of one degree lower than wave (A) and hence wave a of a new pattern.

wave (b) : from 4131 to 2713 (Dec. 96)

wave (c) : from 2713 to 4605 (Aug. 97)

wave (d) : from 4605 to 2850 (Dec. 98)

Observe that wave (b) is little longer than wave (a) and wave (d) is little shorter than wave (c), which confirms the nature of running expanding triangle.

wave (e) : from 2850 to 6150 (Feb. 2000) is the longest and the most complex wave of the triangle. It was also the most violent among all the waves covering large price action in a shorter time.

We also observed that the volumes have been continuously on the rise from the beginning right through the end of the triangle. The a-c and b-d trend lines are both inclined upwards but are still diverging. Wave (e) has cut the a-c trend line. Wave (e) is almost 261.8 per cent of wave (a) in both price and time. All these characteristics confirm the presence of a running expanding triangle.This triangle completes wave (B) of the irregular failure flat, which took three times as much as of wave (A) and is more than 161.8 per cent in price of wave (A).

The Present

Wave (C) of the flat pattern has begun from the top of 6150 and is currently in progress. If this analysis is correct, then this wave should fail to cross the index of 2820 again thus creating a failure. According to Neely, out of three adjacent waves of the same degree two are similar and the third one behaves differently. Since wave (B) has consumed a lot more time compared to wave (A) of the flat, wave (C) should also take about 16 months (equal to that of A) or about 32 months (50 per cent of A+B). Since wave (C) has to consume time it will most probably be a terminal impulse pattern, which consumes a lot of time but not price. At the moment possibly we are in wave (1) or (2) of wave (C). I am expecting a substantial drop in volumes during this wave (C).

The Future

The presence of a truncated zigzag in wave (A) position, followed by running expanding triangle in wave (B) position to be probably followed by terminal impulse pattern in wave (C) position and thus completing an irregular failure flat pattern of one higher degree are simply screaming that the impulse to follow will have great potential to take us past the 10,000 mark in near future. But before that rally comes, we will witness perhaps another 1-2 years of equities trading at low prices. It remains to be seen, who can act against a bearish public sentiment to accumulate sound scrips at low prices and then ride a bull wave of unprecedented proportions.