Motherson Sumi Fractals (elliott wave)

Auto Industry, depicting robust fractals (part 1)

Not long ago, auto industry and its ancillary companies were hitting all-time highs. But lately the mood has been somber. Motherson Sumi <mothersumi> is down 40% from its 13 month high (or rather all time highs), whereas Maruti is down more than 25%. So is it the right time to buy?

What caused such change in fortunes? Can fractals come to the rescue.

What are fractals?
Something that seemingly depicts a similar pattern in successive small magnification. Something similar to a snow-flake or Mandelbrot set. Its the same/similar pattern repeating itself over and over again in different time sets of the same data set (meaning stock of maruti will depict a similar pattern weather looking at price history of last month or last year or even a decade) . But before we explain this further, lets just jump right in and use the example itself to explain fractals and why has the auto industry stocks under performed the market lately.

Not long ago, auto industry was the darling of the stock market. As the below infographic from an Economic Times article (source) depicts, targets being met before time or at least seemingly so. Auto stocks were on fire, fuelled by growing income among Indians. The vehicle that transports you says a-lot about the person (seemingly so), and what other way to say you have “arrived” than to have the latest car with the gizmos and the phoo-phar (I can’t take credit for coining this word, someone much more wittier than me deserves credit).

“India’s largest car makers and component manufacturers are growing faster than their own predictions, with both expected to cross their 2020 targets as much as a year sooner. “

Economic Times (article)

Dated: Jun 26, 2017 (Economic Times)
The rage was very much justified, a simple comparison with the Nifty /Sensex will explain. From the 2009 lows, Nifty has gained 400%, as compared to Motherson Sumi which has gained a staggering 2650% (even after cracking 40% from its recent highs). Similarly, Maruti has gained 1400%+. That is some out-performance!

But the question for investors today is – while the market has recovered quite sharply from its October lows of 10,000’s in anticipation of Lok Sabha results, the auto stocks are dragging their feet. So is there more pain or an ideal time to bottom pick em.

Be careful, bottom picking is not an art but a mere illusion very few people (almost good as no-one) have mastered. But don’t worry I have a simple way of solving this issue for us mortals. But before we jump to that, Fractals.

We shall pick motherson Sumi to explain fractals and possibly chart the future of the stock price of <MOTHERSUMI>. Akin to the saying; two step forward, one-step backward is also how a stock progresses. In any move up from a significant bottom (think 2003 or 2009) has two qualities a strong move in the up direction, interrupted by a few corrections. Elliott a technical analyst, identified that a singular move has 5 waves, 3 in the direction of the larger move (in our case up) and 2 as correction (akin to one step backward). Please note Elliott wave theory is a framework for analysis and is not recommended to be used for trading!

Where it gets interesting is that each of these 5 waves make a larger wave and so-forth. A robust fractal , encompassing of the same pattern within it self. If you want to know more search “Mandelbrot set”.

So lets look at Motherson Sumi and try to answer what long-term investors should do. Yes fractals can help us answer.

Figure 1: Since 2009 lows, motherson has rallied in 5 waves, quite discernible I must add. The 5 waves have been marked as wave (1), (2) and so on. Quite neat huh, what will get your goat is that there seems to be some relationships between waves. For example wave (3) will never be the shortest of wave (1), (3) and (5).
Now what, you say you see the five waves but what next? each of the wave (1), (3), and (5) also depict smaller 5 waves (a fractal begins to emerge). So we will zoom in-to wave (1).

Figure 2: Wave (1) zooming-in.

Figure 3: Can you see the 5 waves marked in red, subdividing Wave (1). Maybe not as clearly as the previous figure, but they are definitely there. But to deliver the point home, lets look at if wave 3 of wave (1) also subdivides into 5.

Figure 4: This is where it gets exciting, wave 3 of (1) also subdivides in 5 waves. Now if I wanted we can go further and divide wave iii of 3 of (1) into 5 waves in an endless cycle, where human patience hits its limit but wave may emerge.
So now you have seen that each wave in the larger direction can be counted in fives. And each wave within itself hides a smaller 5 waves. So why is this important and how does it help up identify areas of opportunity and risks? So lets backup a bit and look at the larger picture.

Figure 5: This chart depicts motherson since 2003 lows, where it shows that 3 waves from 2003 lows are complete and 4th is either on-going or complete at its march lows.
So this tells us first thing from investing point of view, that there is at-least one wave to the up left, before a another correction. (Homework: can you take wave (3) of larger ((3)) and find its subdivisions). Coming back to our example, wave ((4)) (double brackets as (( )) represent circles on the chart so if I refer to wave ((3)) its the wave 3 circle marked in green in figure 4) is either complete or on-going. Unfortunately like I said bottom picking is not what I am offering, but a way of finding the most conformable investment situation. So wave ((4)) is either ongoing or complete, we don’t know. But what we know is that there is another wave, which is wave ((5)) that is yet to be formed, so prospects look good for the stock.

But as an investor and some who wants to utilise fractals and elliott wave framework for analysing the stock market, you need actionable information. So the question you ask when to buy?

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