Saturday, May 23, 2009

Elliot Waves and the Sensex

This week I thought I would take a break from Fundamental Analysis and talk a bit about the Elliot Waves.

More about Elliot Waves can be learnt from

What are Elliot Waves?

The Elliott Wave Principle is a detailed description of how groups of people behave. It reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific and measurable patterns.

One of the easiest places to see the Elliott Wave Principle at work is in the financial markets, where changing investor psychology is recorded in the form of price movements. If you can identify repeating patterns in prices, and figure out where we are in those repeating patterns today, you can predict where we are going.

The Elliott Wave Principle is named for its discoverer, Ralph Nelson Elliott.

I have been fortunate to have interacted with Spandan Joshi, who is a Master of the Elliot Waves. I would like to acknowledge his immense support and enthusiasm in goading me to learn about Elliot.

The below analysis draws a great deal from his studies.

Elliot Waves are typically consisting of 5 waves, with 3 waves going in the upward directions and 2 waves retracting. Post this, there is a corrective A-B-C wave structure.

The corrective waves correspond to the Fibonacci retracement levels of 23.6 % or 38.2 % or 50 % or 61.8 % or 74 % or 89%.

The current bull run began in Sept 2001 at Sensex levels 2598 and the 5th wave ended in last Jan at 21206.

The corrective A-B-C structure began then onwards.

A and C would be downwards and B upwards.

A began 21206 and ended at 7797 in Oct'08.

B began at 7797 and would end at 38.2%, 50 % or 61.8% levels of the entire A wave.

Length of A = 13409 points.

B if = .382 = 12919

if = .5 = 14501

if = .618 = 16083 or higher.

We are currently in this B up move presently.

B again has 3 legs A, B and C, A and C upwards and B downwards.

B-A has been ongoing from 7797 and if we consider it to end at 14939 after elections then B- B would take us to 12157, 11368, 10526.

Post this we would see the final rally of B-C to maybe 14501 or 16083 levels.

Then the wave C would take up back to sub 10000 levels. Anywhere from 9500 to 5000 levels.

In a nutshell, we may rally upto 16000 before falling back to 5000-9000 levels on the Sensex.

Please note the Elliot targets appear fantastic, but events do happen which make those levels appear.

I didnt believe Spandan when he spoke 8000 levels when Sensex was at 17000.



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