Mail from a reader in India:

…. If you can find some time please tell me your views on the stock of Reliance Communications. ProfitSource Elliott Wave shows that the 5th on the daily and weekly charts is confirmed and the 3rd wave on the monthly chart is confirmed. The monthly chart is therefore pointing towards a long target of about Rs. 178-214 for the 4th wave by mid 2013 to end 2013. Although, at the same time other indicators are still suggesting a little more downside and that the Indian markets (NSE and BSE) are expected to bottom out in early July to mid July. Considering this scenario and your own analysis, do you think it would be a good idea to take a long position in Reliance Communication for about a year?

Let’s look first at the bigger Indian picture – the Sensex:

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I would be careful about being so specific that the Sensex will find a low next month – maybe towards the end of 2012. It is still an unfolding scenario and we need to be open to changes and have zero expectations. The Indian market made a major double top in late 2010 and thus I expect it still has a fair way to fall. India’s economy is taking a big pause.

I wish to avoid commenting on specific reader’s stock requests as this would be unmanageable, but on this occasion:

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Wave four and three are confirmed but no wave five confirmation - and certainly no wave four relief rally - are in sight.

Note that my setup uses Fibonacci numbers.

One of the things to note with all Elliott waves is that there can be a number of waves - wave threes, fours, fives etc., The first wave five is at 40 rupees but by my reckoning there could be a much lower wave five. There is no need to say where as we just monitor it but you should set up clear criteria for when you might ‘buy in’. In my view, it is dangerous to punt on a low.

My view is never to aim to buy at the level. I generally look for the start of a new set of upward impulse waves, that is, the beginning of a new rally. I am conservative in this regard but it has not kept me from making money. I have learnt this from hard, early experience. Low risk and great returns and sleep peacefully at night. What more can we ask for? Never punt.

Some investors like to punt on a hunch and you need to decide if you are going to punt or stick to your rules. It is dangerous to vacillate from one to the other. Choose one and stick to it.

Enjoy the ride

Tom Scollon