Patterned nature of freely traded Markets makes them Predictable!

We, at Waves Strategy Advisors, believe in the theory that freely traded markets are patterned and exhibits fractal nature. This makes them behave in a predictable manner. By pattern we mean that there are certain structures that repeat itself from time to time and can be seen on charts that shows prices of any tradable instrument. The “Fractal Nature” is again an important concept which states that these repeatable patterns occur on varied time scales and can be seen on 1 minute charts to Daily charts to Monthly charts. Fractal structure is seen in nature across from DNA to snowflakes to galaxies and so it is also seen in stock markets which reflect collective emotions and social mood of humans.

Humans behave in a manner, when given a stimulus, in similar and probabilistically predictable fashion. This behavior of acting in similar ways makes us no different than the other creations of nature. Freely traded markets are the only sources that reflect the collective behavior of humans and the current social mood. Highly liquid markets cancel out the random events and what is left is the social mood of the mass and that indicates what we can expect in the future. We believe that any freely traded markets like Equities, Forex, Commodities move in the form of repeatable wave patterns that exhibit fractal nature at various degrees. This behavior was first observed by Ralph Nelson Elliott in 1930s and was later revisited by Robert Prechter in 1980s. This study of waves is now famously known as Elliott Wave.

We identified this important Fractal formation in Indian stock markets on 20th February 2011. The below chart shows a weekly Nifty chart with big “Election gap” when markets hit upper circuit and a 15 minutes chart on the right with a small intraday gap. This is the best Fractal example one can find in stock markets:

Elliott wave provides us the tool to identify these repeating Patterns & Fractal nature of markets and helps us exploit them to our advantage.

chart courtesy: Elliott Wave International

As per Robert Prechter, the above chart shows Elliott's idea of how the stock market is patterned. If you study this depiction, you will see that each component, or "wave," within the overall structure subdivides in a specific way by one simple rule: If the wave is heading in the same direction as the wave of one larger degree, then it subdivides into five waves. If the wave is heading in the opposite direction as the wave of one larger degree, then it subdivides into three waves (or a variation).

This Elliott wave pattern is seen across the world major stock indices.

Everything in this world is symmetrical & patterned and there is no place for randomness to exist for extended period of time. We are against the theory of Efficient Market Hypothesis that claims humans are rational animals. This is against the law of nature and humans do deviate away from rationality and choose the path of herding thereby exhibiting trends & patterns of repeatable forms / structures, making it plausible to predict the markets.

There is no chaos in this perfectly rhythmic world which is driven by the laws of nature and freely traded markets like stock markets are no exception!

Waves Strategy Advisors is one of the elite market forecasting and research house in India providing in depth analysis and forecasting of global markets across varied asset classes including Equities, Commodities, Currencies, Bond Yields. Analysts at Waves Strategy Advisors are qualified Chartered Market Technicians (CMT) & Chartered Financial Analysts (CFA) who employs unique techniques of Economic, Cycle and Intermarket analysis along with Elliott waves to derive at market forecasting. Waves Strategy Advisors also educates and trains investors and public at large about scientific and systematic mode of investing and trading.

Contact information: Email: helpdesk@wavesstrategyadvisors.com, Follow us on Linkedin / Facebook / Twitter: Waves Strategy Advisors

Nifty intermediate top in place?

Nifty continued to drift lower as we were expecting. USDINR chart also supports our bearish view on Indian markets!

Nifty weekly chart:

Nifty Daily:

Nifty 60 mins:

Nifty continued to move in downward direction. Advanced decline continues to deteriorate with 1800 declining stocks vs 1080 advancing on BSE. There is no relief rally either in smallcap or midcap space. All this continues to confirm our stand that current down move will lasts atleast for few weeks now.

As seen from Nifty weekly chart, we have a big red candle this week for first time since 4600. Psychologically many traders might still be holding onto their long positions and assuming the current pullback as minor downside correction. Fall might gain acceleration when longs start getting unwind. Objectively, long positions shall be exited unless we move back above 5570 which will then confirm current pull back as minor correction. But unless that happens we maintain our bearish stand.

As seen on 60 mins chart, we have now drawn a new blue channel. Prices are well confined within this band. Please lower your stops now towards 5540 levels.

We mentioned in our report published on 2^nd January 2012, “An end of terminal pattern result in euphoric rise that retraces the complete previous down pattern in less than half the time and sometimes in just a fourth of the time. A move up as shown on chart will be surprise to many but not to our readers.

An up euphoria will then be created by Nifty breaking above crucial resistance levels as shown and a new up trend has started in 2012 will be the talk of the town. Nifty can move high to as much as 5600 – 5800 levels. However we would be looking out for shorting opportunity…”

And following is the statement by “IIFL” yesterday on current rally in Indian markets -

“If I had to choose one of the options, then I'll say it is the beginning of a bull market rather than a bear market rally…”

We can clearly see drastic shift in the sentiments from acute pessimism to extreme optimism. This is not a surprise to us and we had clearly mentioned this will happen on 2^nd January 2012. Also the statement has come exactly at the time when we are looking for shorting opportunities.

In short, the trend continues to be down and sentiments along with USDINR are supporting our bearish stand which might last atleast for few weeks. Any move above 5570 will however indicate one more minor up leg is pending after which the correction will start but that looks like a lower probability scenario as of now.

USDINR at crucial juncture!

See yourself what do we think of Indian Rupee against US Dollar (USDINR). Prices have been moving in predictable fashion and forming very clear Elliott wave patterns.

USDINR (Feb Contract): Daily chart

 Prices moved up in 5 waves and made a high near 55.06 (Feb contract).  From there we corrected in the form of wave A till 49. We are now bullish on USDINR for following reasons:

1.       61.8% retracement of entire move up from 45.45 to 55.06 (Feb contract) is at 49

2.       Previous 4^th wave support is at 49

3.       Internal wave counts show we are in 5^th wave which is forming as ending diagonal

4.       Time cycles show we are nearing a bottom very soon and shall start rallying (i.e. USDINR move up) anytime now

5.       10 period ROC is showing strong positive divergence with respect to price and has now moved towards 0 levels.

We think that USDINR shall bottom anytime now in next week and start a strong leg up which will take prices atleast towards 51 – 51.50 levels. Let us wait and watch if we are measuring this currency pair correctly with our technical tools!

For more information on Forex Financial Edge short term update, which is published alternate days that show not only USDINR but also other cross pairs GBPINR, JPYINR, EURINR, write to us on helpdesk@wavescapital.com.

Waves Capital - Nifty Happened scenarios - Path Ahead:

Waves Capital (www.wavescapital.com): Below excerpts are picked up from past 3 Financial Edge short term updates and this itself proves how accurately we are measuring the pulse of Indian markets. Write to us on helpdesk@wavescapital.com if you would like to subscribe to this Daily research publication on Indian Equity market and see where we are headed from short to medium term.

Published on 3rd Jan 2012:Nifty Daily chart: PATH AHEAD

Published on 3rd Jan 2012 before 8:30 am: We have shown Nifty path ahead on 3rd January 2012 when bearish sentiments were prevailing across the crowd. We were bullish then for a target near 5600 – 5700.

Happened as on 21st Feb 2012:

Happened: Nifty went up in this one side trend from 4600 levels and made a high of 5629 earlier than March. BANG ON!!!

Published on 21st February 2012 before 8:30 am:
Nifty Weekly chart:

Published on 21st February 2012 before 8:30 am: As shown on weekly chart of Nifty we have reached near the very strong resistance trendline since November 2009. This line acted as strong support for many months and shall now act as strong resistance (Polarity reversal)... However failure over next few days will confirm the importance of this resistance zone and we will be looking for trend exhaustion as long as 5650 – 5700 remains intact on upside.

Happened: Nifty failed to cross above the mentioned levels of 5650 and reacted steeply down on 22nd February falling more than 100 points in single trading session.

Published on 22nd February 2012 before 8:30 am:
Nifty 60 mins chart:

Published on 22nd February 2012 before 8:30 am: We believe this trend from 4685 is in its matured state and as long as 5650 – 5700 is not broken on upside we will refrain from initiating fresh long positions…BANG ON!

Happened: Selloff was seen across the sectors with blue chips like SBI, DLF, Tatasteel, etc falling more than 5% and Nifty fall by almost 2% in single day closing at 5505 from high of 5629.

Subscribe to our “Short term Financial Edge Research” to see where we are headed from here and trade objectively with strict stop loss and target levels. We have been able to capture entire move up from 4685 levels and have been out when most of the people started turning bullish. Write to us on helpdesk@wavescapital.com to subscribe NOW!

Waves Capital (www.wavescapital.com) - Applied Elliott wave - Ending Diagonal pattern: ABB

Waves Capital (http://www.wavescapital.com/): Elliott wave Ending Diagonals are wedge shaped patterns that offer very good trading opportunity. The below is an excerpt from Financial Edge short term update published daily before 8.30 am that shows Nifty along with 3 other stocks exhibiting such appealing opportunities. Subscribe now by writing to us on helpdesk@wavescapital.com and get the best of the trading opportunity alerts in this fast moving market.

ABB Daily chart:

Anticipated on 5th Jan 2012

ABB Happened:

On 5th January we mentioned “ABB on the daily chart has formed an ending diagonal pattern. The prices have given a break on the upside & sustaining above the downtrend line. At the bottom the RSI is showing a strong positive divergence. In our view wave ‘E’ has completed near the 540 levels. In the near term we can expect an upmove to 670 -700 levels. The stock has immediate support near 565 levels. As long as 540 levels is protected on the downside we would maintain a positive stance for further upside from current levels.”

As anticipated in our previous update prices have completed the wave ‘E’ & we could see an up move that far exceeded even 700 levels. In the above chart we can see the stock has made a vertical rise after breaking the ending diagonal pattern & has retraced the entire fall of the diagonal pattern to 900 levels. The stock has given a 50% return in quick time.

Write to us on helpdesk@wavescapital.com to see what lies ahead for ABB and Indian markets.

Nifty spectacular rally - A surprise for many!

 Nifty Daily chart:

 Nifty 60 mins:

India is not the only market that has rallied hard yesterday. Asian markets like Hang Seng (HongKong), Taiwan, Nikkei (Japan) registered more than 1.5% gains. The rally in India is not in isolation but in sync with other Asian indices and we are not seeing any exhaustion yet in Asian markets.

Yesterday’s rally has been strong and we reached the target zone of 5500 – 5550 in single day. Also the gap up opening indicated that 5425 was indeed a crucial resistance level. We have said before crucial support and resistance levels are usually taken out with gaps and that is what we saw yesterday. However from trading perspective this kind of openings ensures that traders do not make money. A gap up of almost 50 points and then continuation of rally indicates there is strength left in this rally. We will not come in way of such a strong rally. However our target of 5700 mentioned on 3rd January report looks now achievable within February itself instead of March.

From wave structure perspective, it seems that wave v is extending and we are in minute wave (iii) of wave v.

Midcap index and stocks continued its spectacular performance. As long as the gap between 5425 and 5475 remains unfilled the trend is up with next strong resistance near 5700 now!

Applied Elliott wave theory - Tatasteel

Tatasteel Daily chart:

Applied Elliott wave theory - Tatasteel

The above chart of Tatasteel shows Applied Elliott wave theory at its best. 5 waves move up was a rare event in 2011 since the entire Indian market was moving in a complex correction. Beginning of 2012 got us with impulsive up moves in few stocks. Tatasteel is one of those stocks and it exhibits what an ideal impulse wave should look like. Not only this stock has followed the 3 important rules but also most of the guidelines as well.

Rules of Elliott wave:

a. Wave 2 cannot retrace complete of wave 1

b. Wave 3 cannot be the shortest of waves 1 and 5

c. Wave 4 cannot enter into territory of wave 1

All of these rules have been followed.

Guidelines of Elliott wave:

a. Wave 3 is usually the longest and can be 1.618 / 2.618 times of wave 1 or larger if extended

b. Wave 4 will usually form a triangle

c. Wave 3 if extended, wave 1 and wave 5 will trend towards equality

d. Wave 5 and wave 3 will usually show negative divergence which indicates loss of momentum and break of 2-4 trendline will confirm impulse 5 waves up is over and 3 waves downside correction has started.

Each of the above rules and guidelines is well observed in 60 minutes chart of Tatasteel. This is the power of Wave theory where one can predict the future action and what path prices will follow.

We have been predicting this movement as and when it was developing. This is indeed a thrilling experience.

Subscribe now to our Daily research publication and see yourself what does Indian major index – Nifty is showing along with 3 stocks selected on opportunity basis. Also learn the power of Elliott wave and see how it works on realtime basis. Write to us on helpdesk@wavescapital.com for more information.

Nifty at crucial channel support!

Nifty Daily chart:

Nifty 60 mins chart:

We have been very accurate in cautioning our readers about the current uptrend. We mentioned in our previous report that we are in matured state of trend and prices might rally a bit and then start correcting. We had a big down move on Friday as soon as 5370 was broken and Nifty closed on that level (5380 after average). Also as seen from 60 mins chart, prices closed on the red channel which is acting as a very crucial support line for the entire up trend since 4685.

Prices re-entered the triangle after breakout thereby warning that the downward correction has started. Next 2 days are very crucial which will tell us if we are correcting in the form of sideways action or a zigzag formation (steeper) correction. Break of 5325 will increase the selling pressure and we can then correct to as much as 5050. We also have a strong negative divergence with respect to RSI.

Time wise February is going to be difficult from trading after good trending move in January. Also corrections usually take more time than impulsive moves and so please keep lower exposures in either direction as corrections can get very complex.

In short, our bias is now negative as long as 5425 is not broken on the upside. A break below 5325 will increase selling pressure else we can move in sideways correction this week.

The Biggest rally since 2011 (Price+Time) continues!

Nifty Daily chart:

Nifty 60 mins chart:

As show on the Daily chart, 5350 is the level below which there was big Gap down opening and Gap up actions during past months failed to take prices above this level. We therefore continue to believe 5350 – 5400 as crucial resistance level and break above this will open further upside targets.

Over medium term we continue to believe that 5700 is the ultimate resistance area and it will be very crucial to see price movements if and when we reach there. For now as seen on 60 mins chart, the red channel is intact and as long as 5250 – 5260 level is not broken on downside we will continue to be positive on Indian markets as a whole.

Midcap index continued to show strength and there is no deterioration in the Advance – Decline ratio even now. We would refrain ourselves from going against such a strong trend and giving levels where current rally shall end but would rather approach the scenario in anticipatory model and we will know as and when prices reverses by breaking important supports and channel lines. Till then enjoy the uptrend as long as it continues.

For long positions, please trail stops near 5260 levels for now.