Tuesday, June 3, 2008

Another Attempt At Elliott Wave Counts

The Nifty, taking the cue from red global markets, opened weak and within minutes of opening reached 4634, very close to the support of 4630, as was mentioned in the post dated 25th May titled “Nifty Breaks Important Support”. And from there it staged a magnificient recovery. Unfortunately, the recovery wasn’t enough to take it into the green but it was enough to end the day to form a doji candle (open and close at or very close to each other), as can be seen in the chart below.

Nifty Daily Chart

As has been discussed in various earlier newsletters, a doji after a downfall is a bullish sign in the short term and the same after an upmove is a bearish short term sign. Now whether this doji is strong enough to take it up in the next 2-3 days or whether the bears win over this doji is yet to be seen. An upmove from this level could take the Nifty to 4800 where it should find resistance again. A downmove will have to go beyond 4630 to reach our estimated support between 4500 and 4550. There was probably another reason for the support found today, as can be seen from the trendline marked with the arrow.

I had written a post on April 21st titled "Are we in wave 3 of Nifty?" in which I had mentioned the basics about Elliott Waves. You can read that post before you continue ahead so that you can recall what I had written that time.

In response to that post, I received an email from a subscriber of mine who wrote the following:

“Dear Sir,

I want to ask you that are we in bullish phase, after the corrective phase of A,B,C? Previously you have written an article "Are we in wave 3?". In the same line I want to add that, now we are in WAVE 2, shortly will enter in to WAVE 3. Below I have given the image for right understanding.

Want to know your comment on it.”

He has been very kind to attach a chart also which is self explanatory and needs no commentary. It is attached below.

Elliott Wave Count - Scenario 1

While the chart is beautiful, in my view, the analysis seems to be incorrect, at least at this moment. In my earlier post, which you have just read, I had mentioned that wave 4 should never never come in the price territory of wave 1. If it does, it means that our wave count was incorrect. That counting went wrong on 9th May when the Nifty came below 4970.80 (the high of wave 1), which led to the conclusion that it was either wave 2 forming, as my subscriber suggests, or maybe some other numbering pattern. It now seems that it isn’t wave 2 also that is forming because our target for Nifty is much lower, between 4500 and 4550. If that does happen then this cannot be wave 2 because wave 2 does not, generally, retrace more than 61.8% of wave 1. In this case it has already retraced a little more than that. In my opinion, we are still in the corrective waves A-B-C, which can also take the 3-3-5 pattern which means that wave A and B would each consist of 3 waves while wave C would consist of 5 waves.

Elliott Wave Count - More Likely Scenario

In the chart above, I have numbered the waves A-B-C in large capital letters and the waves within these larger waves as 1-2-3-4-5 in smaller font. I think we have completed the 3 waves of the corrective wave A, the 3 waves of corrective wave B and are in the 3rd of 5 waves of corrective wave C. This 3rd wave could go between 4500 and 4550 from where we will have a small bounce back which would form wave 4 (not to exceed 4900) of the C wave and then a downfall again, which would take the Nifty to 4100-4200 (or lower??). That would, probably, be the end of the bear market from where it will be a new beginning. That is what the Elliott Wave Theory tells us right now. However, I must admit that I am not a master of Elliott Waves and the market could again prove my numbering to be incorrect, if it so decides. I, like all other analysts, respect the market and believe that market is supreme.

According to a1samud, there is a very famous saying by Mahatma Gandhi, which I quote below:

"A customer is the most important visitor on our premises. he is not dependent on us. We are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider in our business. He is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so.”

I would like to twist it a little to fit the relationship of analysts and the markets. Here is my version of it:

"The markets are the most important element of our lives. They are not dependent on us. We are dependent on them. They are not an interruption in our work. They are the purpose of it. They are not an outsider in our business. They are a part of it. We are not doing them a favor by analysing them. They are doing us a favor by giving us an opportunity to do so.”

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!