| For the second time in just over two months, the markets caught the bulls off guard. In March almost all the stock market indices dropped by about 8-10 per cent in a matter of just three weeks. |
| Many correlated this fall with surging crude oil prices, rising US Fed rates, Indonesian tremors and several other things they could think of. |
| From the Elliott Wave point of view, this behaviour of the market was absolutely normal (explained later) but it did force many to liquidate their long positions below 6400 on the Sensex. |
| One may try the following exercise. Any fine morning when you read a business daily, like the one you are reading right now, you will find a host of news. Some would appear to be good for the markets and some bad. Then later in the day observe the market movement. |
| If the indices go up many, may be including you, will link that with the good news and if they are down, the bad ones. |
| Actually, as I have mentioned in my earlier articles in Business Standard, the charts of market indices are the graphical representation of the psychological trends, which take their own course once set in motion. |
| Good and bad news only induce temporary hiccups in the down or up trends respectively. The market is too powerful to behave the way we wish. |
| At the moment, as per my analysis using Glenn Neely's Neowave theory, the Indian markets seem to be poised for another huge rally to be followed by a nerve-racking fall. |
| Technical outlook In my last article in The Smart Investor (dated December 13, 2004) I had analysed a weekly chart of the BSE 500 Index. I had mentioned about an a-b-c zigzag pattern followed by an x-wave (in the form of a non-limiting triangle). |
| The trend lines of this triangle are converging but skewed upwards, indicating that the second pattern to follow would probably be another zigzag (larger than the first). I continue with my analysis from where I left. |
| Wave 'a' of the second zigzag is getting properly subdivided into five parts. Of these waves 1, 2, 3 and 4 seem to be over and wave 5 has probably begun at 2646 on BSE 500 (6321 on the Sensex). |
| Wave 2 was a double three running correction, which was followed by an extended third wave that is two times the first wave in price and time. Wave 3 was in progress when I wrote my last article in December 2004. |
| Wave 4 started at 2838 (Sensex 6696) on January 4, 2005. Within wave 4, wave 'a' got over on January 25, 2005. This was followed by a larger, called irregular 'b' wave that finished on March 9, 2005. Now here we have an important point to note. No Elliot pattern terminates in just two parts. |
| Hence this wave 'b' was going to be followed by wave 'c' and that did happen. This was normal behaviour from the Elliot perspective as I have stated earlier. Now many may consider the January fall to be the complete correction of wave 3. |
| But remember, as per Neowave rules, wave 4 must consume more time than wave 3 (44 trading days). For that reason, even though the market reached a new high, it was not a new up-trend, but a part of fourth wave correction. |
| Now since wave 'c' has not breached the January bottom, wave 4 has become an irregular failure flat pattern (see chart), whose implications are enthralling. |
| If my analysis is correct, then this structure must be followed by yet another extended wave that would be 1.618 of wave 3. That would take the BSE 500 past the 3500 mark, the Sensex past the 8000 mark and that too within three months - that is, before the end of June. The diverging trend lines shown in the diagram also confirm this view. |
| Warning: such an extended fifth wave, once over, gets retraced very swiftly by more than 61.8 per cent. |
| Investment perspective According to Glenn Neely, within an impulse, the wave that involves maximum public participation becomes the longest. The situation which I am expecting now is a double extension - that is, third wave greater than 1.618 of the first and the fifth wave greater than 1.618 of the third. |
| This will create a much greater euphoria as the fifth wave progresses, attracting more and more people, which will cause it to extend. The sectors which I had mentioned in my earlier articles - textiles, banking, cement, auto ancillaries, etc. - should continue to do well. |
| The money being poured in these and even other sectors should cause phenomenal appreciation in many stock prices. But remember it is a short-term investment opportunity for now. One needs to control greed to benefit out of this rally. |
| Now it is up to you to decide whether to join the party sooner or if not later to pay the bill. |
| (The author is a Neowave analyst and may be contacted at milindkarandikar@hotmail.com ) |
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