Sensex Daily Plot

Sensex Daily Plot 26/03/2011

NEoWave Question of the Week

Question: In the past, you've warned that markets are difficult to predict when wave structure is in its "middle phase" of development. What techniques should one use to trade such periods?

Answer: The "middle phase" of a Flat or Zigzag is wave-B. The "middle phase" of a Triangle is wave-C; in a complex correction, it is wave-X and in a NEoWave Diametric it is wave-D. The larger a correction, the longer its "middle phase" will last. If a pattern spans years or decades, its "middle phase" will last months or years (respectively). During such periods, wave structure uncertainty can be so high that trading is all-but-impossible. To successfully navigate the "middle phase" of any correction (on any time frame), Tier 2 market analysis techniques are necessary (Tier 2 refers to mathematical manipulations of price data that suggest market turns as opposed to direct analysis of price action, such as wave theory. that can be used to "confirm" and anticipate market turns). During large, complex corrective patterns (like the 20-30 year S&P consolidation beginning September 5, 2000), overbought/oversold indicators (i.e., Tier 2) can be used to assist with market entry and exit. Some of the more popular might be RSI (relative strength index), MACD (Moving Average Crossover Divergence) and Bolliinger Bands. I've developed my own, which I call the MOAT index. The problem with overbought/oversold indicators is they can stay overbought or oversold for very long periods, causing huge, potential losses if stops are not employed wisely. A methodology should be used to reduce risk and increase the odds of success. I'm not an expert on publicly available, overbought/oversold indicators, but if I were using one of them and knew a market was near the middle of its pattern development, I'd employ it this way. TO GO LONG: If my indicator showed the market oversold, I'd find a prior, identifiable low to use as a sell-stop to limit losses in case the downtrend resumed. In other words, I'd buy into an oversold decline that occurred AFTER a major low and use that major low (minus 1-tick) as my stop. TO EXIT LONGS or GO SHORT: If my indicator flashed an overbought condition, I'd exit my Long when market strength is present, or a level of price "excitement" is evident OR upside acceleration occurred along with excess media coverage. If I'm out of a market, and the indicator is overbought, I'd wait for a larger-than-normal decline off a major high, then look to Short on a 50% retracement (or more) of that initial drop off the major high. Under this approach, the major high (plus 1-tick) would be used as a buy-stop to limit losses in case the uptrend resumed.

NEoWave Question of the Week

Question: How much can wave-2 retrace of wave-1? Most orthodox EW analysts allow 99%, but it appears NEoWave only allows about 61.8%. Answer: The amount wave-2 is allowed to retrace of wave-1 depends on two, important questions. Is the larger impulsion Trending or Terminal and is wave-2 a monowave or does it subdivide into an a-b-c? Let's address each variable one-by-one. In TRENDING Impulsions (this is where waves-2 and 4 CANNOT share any of the same price territory) 1. If wave-2 is a monowave, it should NOT retrace more than 61.8% of wave-1 2. If wave-2 subdivides into an a-b-c, on rare occasions, wave-a might retrace more than 61.8% of wave-1, but wave-c (of wave-2) must conclude at 61.8% or less of wave-1. In TERMINAL Impulsions (this is where waves-2 and 4 MUST share some of the same price territory) 1. If wave-2 is a monowave, it CAN retrace more than 61.8% of wave-1 2. If wave-2 subdivides into an a-b-c, BOTH waves-a and c (though not required) can conclude beyond a 61.8% retracement of wave-1. It is during Terminal patterns that wave-2 is allowed to retrace as much as 99% of wave-1, but never 100% or more

NEoWave count on Sensex Weekly

Sensex seems to have completed its wave B with truncated wave c of Double Zigzag. As a result wave C down opens which can consume around 16-18 months.(As per Neely in a Flat wave C is equal to time taken by A+B/2).

Now there are 2 possibilities

Either wave C takes normal imuplse

Or it can be Terminal Impulse.

As of now its not clear which shape it takes. So I continue to label it as both 1/a , 2/b....

Now as wave C could take 16-18 months of time , its more probable wave C takes shape of Terminal impulse, in which wave 4 over laps wave 1.

In terms of Price wave C of a Flat can be either of the three.

Normal...

.if in terms of price wave C = wave B. as per this wave C could reach 8000.

Elongated....

.if in terms of price wave C is atleast 127% of wave B, as per this wave C could reach as low as 4500.

Truncated...

.if in terms of price wave C is less than that of wave B, in this case wave C could be in range of 11k - 12k

So its best for investors to stay out of the equity market for atleast 18 months. Buy and Hold is not right strategy.