Markets have seen a sharp correction from 7784 levels (25479 BSE Sensex). The prices have respected the trend channel that has been in play since March ’15. This was the correction we have been expecting that should mark the end of wave 1 & develop into wave 2 correction as per elliott wave theory. The end of this correction would mark the beginning of wave 3 which should turn out to be very powerful.
The focus now is on wave 2 correction and how far the prices may fall before reversing and resuming the longer term bullish trend. As far as the magnitude of the fall is concerned this fall has already exceeded the size of previous corrections in the rally from February lows. So theoretically this fall is sufficient magnitude wise for the next rally to develop any time. The markets today rallied by 1.5% . The level of 7616 (24852 on Sensex) will now become an important level. A break of these levels might completely reverse the rally from today’s lows.
Ideally we would like to see a complete 5-wave up move before calling any bottom. The trend channel we have been tracking has been respected so far as we anticipated in our last article too. However given our analysis, if prices were to try and retest this trend channel again, we should expect them to be able to break the trend channel & rally faster. Any such move would definitely confirm a wave 3 in action. As per elliott wave theory wave 3s are wonders to behold and most of the returns are accumulated very fast in this leg, while most price corrections in this wave are short lived. The break of the trend channel should be a clear signal that we are in a wave 3 rally. Chart Below: