Elliot Wave Theory is a specialised area of technical analysis. Vivek Patil uses Neely's modifications to extrapolate the Sensex's moves from here into the long-term future.
In a series of articles published in The Smart Investor starting July 7, 1997, it was predicted by means of Neely-Modified Elliot Wave analysis that the Sensex would achieve a minimum target of 5545 points by January 2000. Since that target has been exceeded by the Large X wave currently in force, another update is in order.
The previous article in this series (The Smart Investor, 26th July 1999) gave long term projections. An updated analysis suggests that the Sensex could have an upside of about 25 per cent (7100 point levels) before this Large-X terminates. Then there will be a powerful retracement pulling it back to 5200 levels. This will be followed by a powerful surge to 45,000 points by 2025.
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Let us start with a recap on the Super-Cycle Degree Wave Count which was calculated on the RBI Shares Index. The Super-Cycle degree wave 1 finished in the year 1946.
This was followed by the corrective wave 2 till 1983 (37 years). The wave 3 commenced in April 1983, and the "Cycle" degree wave-1 within it finished in September 1994. From September 1994 onwards, we have been in the Cycle degree wave-2, which will complete only after 2002.
A close examination of this Cycle degree Wave 2 is in order. This was projected to be a "Complex Corrective" involving two standard correctives separated by a large-X wave. The first corrective was a "C Failure Flat" from September 1994 to April 1999. Within this, the wave-b was an "Expanding Triangle" and wave-c was a "Terminal Impulse with 5th Failure" ending at 3183 points in April 1999.
A re-examination of the cap on the Large -X Wave: By definition, a "Large-X" should see a minimum 1.618 times move from the first corrective end, which gave the minimum earlier target of 5545. This has been achieved. Its internal construction would alternate with the first corrective, which was a Flat. Therefore, the current "Large-X" should be a "Zigzag" or a "Double Zigzag".
What's happening now?
Remember that 5545 was the 1.618 "Minimum" target for the Large X, and it could go up in Fibonacci ratios to a level of 7100 points, which would be a 2.618 ratio to the first corrective. If such a case occurs, we are currently only in the middle of the Large X wave as shown in the projection in Chart 1. After consolidating at this current level of about 5700, we (5400) might see a further movement beyond 7000 as shown.
Whipsaws
Within the Large X wave, one would normally see whipsaws where some new stocks and sectors would skyrocket while erstwhile pivotals languished. Thus the trading strategy, therefore, is necessarily dictated by the individual stock/sector specific stories.
Warning
All Large X waves usually end with a "Terminal" or "5th failure" which generates a sharp fall. This fall retraces almost exactly 50 per cent of the entire Large X. In case of the Sensex, assuming X finishes off around 7100, then the fall would be 50 per cent retracement of 3183 to 7100, i.e. around 2000 points. In this fall, there would be all-round value erosion.
Stand warned on this account. Regardless of the exact level at which the Large X terminates, a 50 per cent retracement is likely and calculated by half the move from 3183 to the top.
We see a famous historical examples in chart 3 of the American Dow Jones Industrial Averages. Such falls occurred in the Crash of 1929 as well as in the Crash of 1987. Both came at the end of a Large X within the 2nd wave. It was a Super-cycle degree in 1929 and a Cycle degree in 1987 respectively. Both these falls were 50 per cent of the respective Large X waves.
Back to the Future
After the Large X, the second corrective would occur for next 2-3 years. The sharp fall after Large X will only be the "a" leg of the second corrective. The second corrective would possibly be a Triangle and would terminate only after the year 2002. Once the Cycle degree wave-2 is over (sometime after 2002), the Cycle degree 3rd of the Super-Cycle degree 3rd would commence. In this most dynamic phase, the Sensex should definitely cross 45,000 in a surge that peaks before the year 2025.
Importance of the Perspective
Such long-term wave counts and projections are basics for policy-makers and visionaries, who have long-term plans. As Sensex is the indicator of what can be expected in the economic future, the projections could well have an important bearing on their strategies.
Traditional method v/s Neely method
To calculate this wave-count and projection, I have employed the Neely method, which is more involved, and uses a more complex set of rules. Some people may find this difficult to follow but it greatly reduces the chances of errors. Other analysts may use the simple basic rules in the traditional method of Elliott Wave Analysis developed by R.N.Elliott, and later popularised by Robert Prechter.
As Neely says : " NEoWave (via the Neely method) can be compared to Elliott Wave Analysis in the same way as calculus is different from algebra. Nothing about calculus negates algebra, it is just more complex, allowing for the solving of more complex problems."
An interesting long-term controversy has developed about the two methods and their application to Wall Street. Employing the traditional method against Neely method, one can make two different wave counts. In the case of the DJIA, Neely was totally bullish over the last 8 years, saying that the Dow should cross 1,00,000 points by the year 2060.
Whereas, Prechter has been totally bearish during the same period, saying DJIA should actually fall below the 1000 level. Even at the current levels of above 11000 points, Prechter continues to be bearish. He says, "A major, indeed historic, downturn is developing". It would be interesting to see who is right.
But what if everyone knows?
Some people have expressed doubts about the efficacy of market action according to projections, when the same projections are common knowledge to all. But the Wave Theory is a Natural Phenomenon. Just as no one can change the laws of Nature, wave projections cannot be changed, although they can become more complex. Neely believes: "As too
many people have tried to apply Elliott Wave Theory, the markets have just enhanced the complexity level of patterns to keep most
people in the dark. "
(Vivek Patil is a technical analyst and creator of the Advanced Stock Analysis (ASA) Program. Email: vivekp@bom3.vsnl.net.in )