MARKET NOTES: The long rumored Dollar rally in world markets is at hand
This blog has long held that we are likely to see a Dollar rally in world markets as QE gets squeezed out of the world monetary system. With DXY breaking atop 82 this week, the Dollar rally is likely on. Dollar being the world’s measuring yardstick, every other asset price will also correct in line with Dollar’s value. We are in for a huge churn in world asset prices across the board. Hard to say how it all fall into place but it will do so over the next 3 to 6 months. Time to be agile with light commitments.
With the Dollar rally on, and equity markets into a correction, one has to see how markets react to prices at first support. Volumes at the critical juncture, both ways, will determine the extent & duration of the ongoing correction. There is little point in speculating until them though the probability of a second deeper leg is a given in Wave IV.
Back in India, the Rupee continued to correct against the Dollar. It bears noting that $EEM, the ETF of choice for all emerging markets, has lead this current bout of correction by many months as the emerging markets were the weakest link in the chain. Correspondingly, emerging market currencies have to some extent anticipated the Dollar rally in world markets. So that fact should cushion the INR even as Dollar rallies from here on against major currencies like the Euro & the Yen. But a Dollar rally beyond 85.50 on the $DXY will be a whole new game.
I would humbly repeat my suggestion to RBI that neither RBI nor GoI has the capacity to raise funds for corporates stuck with unhedged FX loan exposure. Rather than raise false hopes just let these corporates take their writes offs with change in managements were necessary. That is the “creative destruction” of capitalism necessary to clean out & rebalance the system & teach the stupid a sharp lessons. It helps establish deep markets & builds a healthy respect for price signals so vital for a functioning economy. So help clean up rather than bail out. You will do India and the entrepreneurs themselves a lot of good.
Don’t catch falling knives or chase bear rallies no matter how enticing those 8% green blips look. They be mouse traps.
Gold closed the week at $1394.90. Gold has been in a counter-trend rally since the low of 1179.40 in June this year. I am rather surprised that Gold hasn’t yet rallied to test its 200 DMA which is currently in the $1520 price area. One would have expected the metal to have sufficient bounce to at least get there if not nick it. The metal may still try to test that area in the next week or two. But barring such a “late” rally to $1520, Gold should now correct gently for the rally from 1180 to 1420 and possibly resume its down trend. While the price correction from current levels may be less sharp than before, there is nothing very bullish about the metal barring a dash to the 200 DMA in order to test it. Avoid longs & take profits.
On the surface, Silver’s story is similar to that of gold. Having made a low of $18.17, the metal has rallied to a high of $25.12 which is just a wee bit short of $26.2 where the metal’s current 200 DMA is positioned. It may nick the 200 DMA in the next week or two. But Silver clearly hasn’t exhausted its down trend and is due to enter Wave V of it downtrend from its recent high of $49.88. The target of the Wave V when it unfolds would be below $14. I would look to short the metal in the $26 price area if it gets there. Nothing bullish about Silver never mind the chatter about commodities turning up etc.
Copper closed the week at 3.2240 coming off from the recent high of 3.3885 just under its 200 DMA. Copper is likely to test the top of its previous trading range at 3.20 as the new support over the next week or two. If the support holds, it will validate my wave count that suggests Copper may rally to 4.0 by end of next year. However, if the support is decisively violated then Copper may go the way of Gold and Silver as well. Not taking a position till the metal’s intentions become clearer.
WTI crude flared up to a high of $112.24 before falling back to close at $107.70. Crude’s future too hangs in balance and it could go either way from here. My preferred wave count specific to crude calls for an extension to crude’s rally from here to to the $115 to $118 price area before a correction sets in to test $105/108 as the new support for crude. Another view that is still valid is that crude was in a counter-trend rally and has seen its current highs at $112 and is likely to move back to retest $90 price area. My sense is that crude may continue to drift upwards even if other commodities go into the expected correction over the next two weeks. Not bearish on crude although remain very cautious in view of the ambiguity on the charts.
US Dollar [DXY]:
DXY broke atop 82 to close the week at 82.03 confirming my wave count that calls for DXY rally to 85.50 at least; though spread over a period of 8 to 12 weeks. My sense is that DXY may rally to the 83 price area early next week before we see a meaningful correction in the currency. However, the long term trend in the currency should be clear by now. This could be rally that shakes up every other asset price as the QE gets worked over & squeezed out of the world monetary system. This rally won’t be about other currencies. It is about the fundamentals of the world’s currency itself. And the rally may overshoot by a considerable margin.
For the next couple of months EURUSD will be more about USD that the Euro per se. I expect EURUSD to traverse the full length of its trading range from 1.35 to 1.20 as the DXY rally proceeds. We may see Euro test the 1.20 level by end of September as the Dollar peaks.
EURUSD closed the week at 1.3215 down from its recent high of 1.3452. Barring minor pull backs, expect Euro to head straight for its 200 DMA in the 1.31 price area next week. Upon a failure to hold the line as a support [might take 2/3 attempts] the Euro’s trip to 1.20 will stand more or less confirmed. Again, this isn’t about the Euro; its about the basic value of the Dollar.
As with the Euro, so with the Yen. Unless BoJ intervenes, which won’t happen until the DXY gets to an extrema in trading range, [Central Banks are getting very smart traders these days & this trend just suits BoJ fine :p] Yen will be driven by DXY. Over the next three months, the Dollar could test 104 Yen or even higher depending on BoJ’s preferred level.
USDJPY closed the week ay 98.16. Barring a reactive pull back to 97, I don’t really see the currency stopping for long on its way to first target at 100.50 Yen to the Dollar. It would be interesting to see how Nikkei responds to the USDJPY developments though initial reaction may be muted.
RBI intervention by opening up a special window for oil importers caused the Dollar to correct sharply from its recent high of 68.80 to close at INR 66.55. With a market vitiated by ad hoc trading disruptions & regulatory restrictions any meaningful analysis of price charts is impossible. So projecting the value of the USDINR become a game of second guessing the RBI. That’s not my aim in this blog.
That said, I had expected the USDINR pair to consolidate from 66 down to about 62 and that might well happen. Over the longer term, assuming trading restrictions come off, I expect the $ to have an upward bias in the INR markets as DXY rallies to 85 or so. Much of the DXY rally to 85 is already in the USDINR price. So don’t expect a 1 to 1 correspondence with the DXY value. On the other hand should DXY overshoot 85.50, [and I think it will,] expect another round of panic by september when the USDINR could shoot well over INR 70. So we are not done yet.
My preferred solution would be for the RBI to close the special window, pass thru crude prices fully, and let all Indian markets correct and clear together by year end so that India can start rebuilding with a fresh slate. The accumulated poison has to be worked out of the system and over-extended corporates should be allowed to fend for themselves including such things as complete change in managements after full write offs. It is the best way forward from the longterm point of view and will also help inculcate a healthy respect for all markets in corporate honchos and business houses. Twenty years after reforms, many still blithely assume their problems & mistakes can be resolved by a wave of Mantri ji’s magic wand that no longer exists. Politicians these days are as much a prisoner of markets as they were once its masters. Learn to respect the market’s price signals. Don’t depend on Govt. fiat. That’s what reforms are all about, no? The one clear message from the carnage in USDINR is that markets are working, that they are mature and rational, and that if left free to operate, they will discipline corporate big-wigs faster than any penal action by government. Three cheers for markets having arrived in India.
Early days to turn bullish on India but the signs are all in the right direction if government/RBI will let markets do their thing and clean up the mess created by stupid business decisions. And of course the huge fiscal deficit.
Hard to see a meaningful correction in Nikkei 225 if the Dollar is heading towards 104 Yen by September end. But correct it must. About 68% of the price correction in Nikkei is already done and the rest should follow in due course. At the minimum, Nikkei must retest the 12500 price area where its 200 DMA also lies currently. Not a time to be shorting Nikkei though. Grab every good buying opportunity to tank up on good long-term exporters from Japan. I think the Japanese markets have bottomed out over the long-term. The bear market from 1989 ended March 2009 and we have just seen Wave I of a new bull markets in Japanese equities. Wave II is in progress and those with deep pockets for the longterm will be looking to buy. Plenty of time though; no rush.
No change in the prognosis for DAX from last week. It is proceeding in the usual German methodical style towards a retest of 7650. I think the 200 DMA on the way, now in the 7900 area, will at best provide a fleeting perch for a couple of trading sessions. To me the 7650 support is the key. We will reexamine if there will be a second leg [or third if you count from 3rd June] to this correction depending on the way the market responds to DAX in the 7650 area. But if my wave count is any guide, this is a Wave IV down from the full bull move up from March 2009 and that means another leg to this correction, albeit a more shallow one, will follow. Don’t buy the dips, not yet any way.
No change in $QQQ prognosis from last week. Still think its is headed for a retest of $69 although that may appear a bit stretched given the shallow correction in the Nasdaq so far. However, if you look under the Nasdaq [$QQQ] hood and probe a bit you find tech stocks like IBM, MSFT, GOOG, AAPL et al which are into intermediate corrections from as early as June 2012 [that’s IBM] and these have been in reactive moves up even as Nasdaq as a whole lurched down. The net of the two trends is a shallow correction to begin with but which will accelerate towards the end as the stocks moving up come back into sync. Nasdaq is a very deceptive creature. So no change in the prognosis for the shallow factor. The index will correct to 69 or thereabouts. Will there be a second leg? There should be on but early to tell. The smarter question will be about what to buy in the first leg down when the market gets to 69. More on that in the next two weeks
NYSE Comp [$NYA]:
$NYA is my preferred index to check for the gaming of both $QQQ and $SPY. As we can see from the $NYA chart, the index is headed in an orderly fashion to 8820 price area and the 200 DMA lies currently at 9060. The index will in all probability simply knife through the 200 DMA bring a fresh waves of selling from long-term investors. The same holds true for $QQQ and $SPY in turn.
Will reexamine targets once the 200 DMA is taken out. For the nonce, 8820 holds. The 200 DMA has not been under serious threat since August 2011. So a violation of the 200 DMA at so late a stage in the bull market could trigger some very serious selling for money that won’t return to equities. So watch for the market’s reaction to the 200 DMA test here.
S&P 500 [$SPY]:
No change in the prognosis for $SPY from last week. The index is on course to test the $155 area as support. Note that in contrast to $NYA, the $SPY 200 DMA is fairly close to first support at $155 and so is unlikely to trigger longterm selling before the index gets to $155. That in itself is a very significant technical point. Note the same holds true for $QQQ whose 200 DMA is also close to first support. Apparently we want a small panic but not too much of it in this correction :p
There may be a second leg to the ongoing correction but we won’t know until we see the market’s reaction to the $SPY in the 155 price area. All I can say is don’t be in a hurry to buy the dips but shorts should take their profits.
NSE NIFTY [$INDY]:
This week I will use $INDY an ETF actively traded on the NYSE and a proxy for the NIFTY. The same weekly chart from the previous week is shown above except that the price levels are in Dollars for the corresponding level of NIFTY.
By taking the INR out of the equation, the pattern on $INDY becomes less camouflaged and more clearer to read. For instance the top of 6198 in June this year is much closer to the top of 6325 in December 2011 than the corresponding points $25.50 and $32.50 on the $INDY charts establishing thereby that we are in bear market that actually stretches all the way from December 2007. It is on this basis that I have been suggesting NIFTY is into a terminating C but with a long tail that could stretch to as low as 4500 before it ends somewhere around January next year.
No change in the prognosis from last week. We will see fairly sharp but short-lived bounces in scrips as short-covering takes hold but fresh buying is unlikely to emerge until a bottom is clearly in place and we know what the contours of the next government will look like.
A three month holiday from the day to day gyrations of NIFTY is a good idea for long-term investors. Others should watch the $INR instead ;-) No, don’t catch falling knives. We are still very early into the correction where defaults by corporates on FX loans outstanding have not yet been triggered. That will come by the 4th quarter or 1st quarter next year.
NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.
MARKET NOTES: US Equity markets stage a routine pullback from 38% retracement level
US Equity markets confirmed a correction by staging a minor pullback from the 38% retracement level on the main S&P 500 index. There was some extra excitement in the NASDAQ [QQQ proxy ETF] following an 8% rally in Microsoft welcoming Steve Ballmer’s retirement. The bear rally is unlikely to change the market direction in either NASDAQ or MSFT. It did give the bears a good scare though.
The Dollar’s preliminary moves after the low 80.90 are supportive of a like Dollar rally back to 85.50. We should see confirmation of that in the early part of next week. Until that happens, other currencies are likely to just mark time. In particular the EURUSD pair appears pretty undecided about where it wants to go.
Commodities were showing an upward bias on a number of charts. While the rallies in Gold & Silver are the usual counter-trend rallies one would expect in a bear markets, the trends in Copper and Crude suggest commodities may be bottoming out. For both Copper and Crude, I have had to revamp my wave counts to take into account the inherent bullishness.
Nearer home the panic in USDINR may have been overdone. Dollar rallied to a high of INR 65.50 which was my year end target for the pair. On more sober considerations, I think the market will settle down for some consolidation above 62 but below 65.50. A rally in DXY would impart an upwards bias to the Dollar in the Rupee market but much of the rally up to DXY 85 is already in the price.
NIFTY staged a routine pullback from 5250 level after a near panic liquidation. However, that didn’t look like the capitulation that the market needs. I expect the downtrend to resume in a more sedate fashion after a brief corrective rally.
There may not be an early end to world bearish trends. Look to exit rallies & hoard cash for better buys later.
Gold rallied to a high of $1385.58 as expected in this blog before closing the week at 1370.80. The bear rally in gold is not yet over and we could see gold rally higher $1425 before it corrects for the price rise from $1180. But that correction is probably two to three weeks away.
Silver too has been in a counter-trend rally from the low of $18.17 and made a high of 23.60 before closing the week at $23.1660. The bear rally may not be done as yet & the metal has the potential to rally to $26 before it corrects for the price rise from $18.17. The metal continues to be bearish in the long term.
Have had to completely revamp my read on Copper following its recent price behavior. I now think the bottom of 2.98 formed on 21st June was the start of a new bull run in the metal that may see it reach for 4.0 by end of 2014. First confirmation of my revised read on the metal will come when it breaks [and sustains] above its 200 DMA and major overhead resistance at 3.4250. That could happen over the next two weeks. Upon confirmation of 3.4250 as the new support, we could be confident that the metal is in a new bull rally. In any case, as suggested before, there is no case for continued bearishness in the metal.
As in the case of HG Copper, have completely revised my wave counts on Crude in line with recent price behavior and revert to a simpler wave count. I now think the low of $77.41 on 21st June 2012 marked the start of another bull rally crude which could see it head for the previous top of $148 by end of 2014. First confirmation of this scenario would come if WTI crude fails to breach support at $99 in the current correction. Crude bounced from its 50 DMA at $103.15 last Friday. Further confirmation would take time but follow when crude breaks atop $110 and sustains above it. My earlier scenario that called for a correction down to $92 before a significant rally is still possible but the probability of that has receded significantly following repeated bounces in the price from $103 area. Hard commodities in general are showing signs of reversing long term trends. Crude and Copper being industrial in use may be the first ones to confirm the reversal in trend.
US Dollar DXY:
DXY closed the week at 81.53, just under its 200 DMA in the 81.60 price area. I continue to think the low of 80.8950 on 8th August marked the base from which a new bull rally in DXY has begun. First confirmation of this scenario will come upon a break above 82 and when DXY observes the 200 DMA as the new support for DXY. I think this could happen as early as next week.
A sustained rally in the Dollar will certainly pressure commodities across the board. Given my read on Copper and WTI crude, it will be interesting to see if these two commodities hold to their rallies despite a surging Dollar.
Not offering an opinion on EURUSD.
USDINR made a high of 65.56 during the week, which incidentally my target for the Dollar by the year end in Rupees. The Dollar closed the week at 64.55. My sense is that the Dollar has overshot its immediate target due to acute panic in the Rupee market and needs to consolidate for a while before its next move becomes apparent.
Expect the Dollar to consolidate below 65.50 and above 62 for the next 4 to 6 weeks. A lot will depend of the contour that DXY follows in the international markets. I think a DXY rally abroad up to 85 may already be factored into the USDINR although that would give the Dollar an upward bias in the Rupee market.
In any case, the worst for USDINR may have worked itself out of the system already.
DAX fell from 8438.12 to a low of 8300, just short of its 50 DMA and then corrected upwards to close the week at 8397.89. There is nothing on the charts that suggests that the downtrend in the index has reversed. I think the continues on its course to test 7650 support over the next few weeks barring normal pull backs of the sort we saw towards the end of last week.
Nikkei closed the week at 13365.17 and continued its orderly decent towards 12500 price area which is also where its 200 DMA is positioned. No change in the prognosis. Nikkei remains in an orderly correction to retest at least the 12500 price area.
QQQ closed the week at $76.67 after making a low of 75 during the week. The pull-back in QQQ surprised because it filled the price gap at 76 in the charts indicating a surprising strength in the index. That the pull-back gained from an 8% rally in MSFT does not take away from the strength of the pull back.
That said, the index continues in its corrective trajectory towards 69.50. Only a decisive new high would negate the drift towards 69.50.
S&P 500 [SPY]:
SPY showed the true underlying trend in the US equity markets without being clouded by the bear rallies in FB, AAPL and MSFT. The share has dropped from 172.14 to the 38% retracement level before staging a modest pullback that may continue in the next week. The index remains on course to test 155 which is also is 200 DMA price area.
NIFTY continued to be in a downtrend. It closed the week at 5471.75 after making a low 5258 during the week under near panic conditions. However, the pullback from 5258 to 5458 is the usual corrective move for oversold conditions and nothing suggests that the downtrend has halted much less reversed.
The corrective pullback may continue for a few days but expect NIFTY to resume its downtrend to the 4800 price area by end of the next week. I would be surprised if the NIFTY does not test 4500/4800 before the current downtrend exhausts itself.
NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.
MARKET NOTES: The correction is here.
NIFTY announced its intentions with a near crash though it wasn’t as severe as I expected. 5500 surprisingly wasn’t taken out although that is no reason to cheer. Nikkei has been correcting for long. The suspense was rserved for the US & EU markets. My reading of the charts shows both EU and US markets have finally tipped into a correction that might not be the usual one shot affair. See the NYSE Composite chart for more on that.
The currency markets were marking time for the Dollar to bottom. Chances are that DXY has indeed bottomed at 80.90 and is now sitting at the cusp of Wave V rally that will likely create new highs. Both EURUSD & USD JPY more or less confirmed the 80.90 bottom in DXY.
Metals staged a bear rally. Not unexpected given the new lows most commodities have made recently. It will be interesting to see how long these bear rallies sustain as DXY rallies and equities come off their highs. I suspect not for very long as people get risk averse.
Nearer home, RBI imposed a slew of capital controls curbing the demand for Dollars in the INR market. It was a self-defeating step except for the 10% import duty on gold which is legitimate from an equity point of view. RBI may have forestalled a move to the $INR = 70+ level with its controls but I suspect we will still see $INR at 62.50 to 65 range by year end.
This is the beginning of a correction which may not be the usual 1 leg affair. So wait to see how markets shape at the lows. Don’t catch falling knives.
Gold closed the week $1371, but well below the congestion zone of $1380. The close also above the metal’s 50 DMA, which is currently in the 1300 price area. The metal could rally higher to the 200 DMA price area of $1500.
Very difficult to see the metal top $1500 in the near future. I would look to sell the metal again above $1500. Until then investors not already into the bear rally should avoid trading the metal. Trading bear rallies for the very short-term is a mug’s game.
Long-term, the metal appears pretty bearish.
Silver closed the week at $23.20, surprising with a bear rally that knifed through its 50 DMA on the way up. Silver is in a counter-trend rally from its recent low, and while the sheer size of the rally looks impressive, the wave counts suggest new lows in the metal are not far off. The present spike can extend $26. However, the meta is likely to trend down by October end looking for new lows. Avoid trading the rally if not already in.
Copper continued in its bear rally mode closing the week at 3.363 just a wee short of its 200 DMA in the 3.40 area. It will probably nick it next week, but as discussed last week, this is a bear rally and its is hard to see any decisive move beyond 3.45 at this stage. I would expect to see the metal to continue to trend sideways till the end of October. While a new low in Copper is unlikely below 2.95, the correction in the meta in terms of time isn’t over.
Brent too continued in its counter-trend rally from the recent low of $98.95, closing the week at $110.40. The rally can extend to $117.50 over the next week or so. However, maintain my view that Brent will turn down back from $117 price area towards $98 and continue is a down trend there after for a long time.
Traders should look to establish shorts in this bear rally at higher levels.
US Dollar [DXY]:
The US Dollar is in the process of confirming a bottom at 80.90 or thereabouts before rallying back to its previous top. As a part of this process, DXY rallied from a low of 80.97 to 81.995 and then corrected down to a low of 81.06. The process of confirmation is complete and I expect a fairly sharp & robust rally in DXY from next week.
First target for DXY from current levels is 82 followed by 82.70 and possibly 83.21. Position traders can go long with a stop just under 80.50. This Dollar rally could be spectacular.
EURUSD turned down from 1.3400 [the double top discussed last week] to make a low of 1.32050, just short of its 50 DMA and corrected upwards to close the week at 1.3329. Expect EURUSD to turndown again from here towards the 50 DMA. I expect the 50 DMA to give way towards the end of next week & EURUSD to then pause & correct from its 200 DMA.
EURUSD is more likely to be driven by DXY than its own steam. But expect the broad trend to be downward barring corrections.
USDJPY closed the week at 97.52. The currency pair presents a pretty confusing picture on the charts. The Dollar has been correcting down against the Yen from the high of 103.56 and that correction continues to propel the $ down towards 94. On the other hand, the correction in DXY is very nearly over while USDJPY is still high up at 97.50 instead of the 94 that one would expect. The strength in the Yen is puzzling.
I expect USDJPY to reconfirm its recent bottom at 96.89 before moving up with DXY. No targets for the currency pair. Will avoid trading it until a clear trend is confirmed.
$INR closed the week at 61.65. Had expected some consolidation in the currency but apparently the panic is such that normal corrections are fleeting. I would expect the $INR to range between 60 to 62 over the next two weeks.
Maintain my target of 62.50 to 65 for $INR by year end. Note the charts, & my methods have, little validity for a reliable estimate given the trading & other restrictions imposed by RBI on $INR. So treat estimates with more than due caution.
DAX closed the week at 8391.94. A few points may be noted. First the wave counts indicate the current leg of the rally ended on 14th August at a high of 8457.05. This high was lower than the high of 8557.56 recorded on 22nd May. These two facts, together with the large number of divergences in the charts & oscillators indicate DAX has turned down for an intermediate correction.
A lot will now depend on where DAX ends up in this leg down. The logical target should be 7650 which is well below the the Index’s 50 and 200 DMAs. If that support is decisively taken out, we will be in an intermediate correction spanning many months. Too early to give the leg down its own wave count. Time will tell. Don’t bet on second chance in this market.
NIKKEI was the first major market to turn down. There have been no surprises at all. The index closed the week at 13650.11 well below its 50 DMA. Note the 200 DMA is in the 12000 area while the previous low was 12435. I would expect Nikkei to at least test its 200 DMA rigorously in this leg of the down correction. So the index has a lot of downside. Not sure what that means for the Yen though.
Last week I mentioned the surprise that Shanghai hadn’t produced the expected spike above its 200 DMA. Well, the index produced one this week but it was just a spike with a small candle body. More likely traders telling other traders we know it should have been there and we will get back to it at a more opportune time. Be that as it may, there is no sign that the correction in the Chinese market is over. I suspect Shanghai will correct down with world markets to test 1850 again and may then rally into its 200 DMA before beginning the last major leg to its correction. Shanghai is into a decade long bear market if not more.
Decided not to bore you with a recap of how right I was about the US markets. You can go back last two posts to see for yourself if interested.
NASDAQ 100 turned down after making a high of 3149.24 on 13th August more or less on D-Day. And then it gapped down to close at 3073.91. NASDAQ typically is the most volatile of the major US indices. But it traces [with lead or lag] every move of SPY. So while its not clear from the above chart if Nasdaq 100 has tipped into an intermediate correction, an examination of the NYSE Composite Index and SPY given later do show that we could be into a fairly long intermediate correction. Not confirmed of course but the logical argument for it is very sound.
First major target for NASDAQ 100 from here is 2825 which is also its 200 DMA. So it should be fairly clear that the 200 DMA will decide the future course of the market.
First point. NYA made a high of 9695.46 on 22nd May and a lower high of 9690.10 on 2nd August. In short, from the previous rally top in May, after a correction, the index failed to make a new high in the current rally. The index’s target on the downside, the low of the previous correction is 8820, and that’s well below the 200 DMA, a serious breach of which will trigger an exodus from long-term investors. Furthermore, the May high is below the 2007 high recorded by the index.
Now the powers-that-be can knock off duds from NASDAQ100 and S&P500 and replace them with new better performing stocks periodically. That legerdemain keeps the indices ticking along nicely. But you can’t pull that trick on a composite index like the NYA because it includes all the stocks on the NYSE. A stock would have to delist to exit. So NYA presents a truer, less “managed” picture of the market. And NYA says new highs on SPY yada yada notwithstanding, the aggregate of stocks on NYSE are in a multi-year bear market. In this leg up they barely reached the previous top. The main trend is down. Will the market reach below its previous low? Common sense says it will. Ergo we have an intermediate down-trend or a sideways market.
Keeping this larger picture in mind, now look at the exchange “managed” indices to decipher their next moves. To my mind both NASDAQ100 and SPY have already tipped into an intermediate correction subject to confirmation by a lower low. But then you need to know if you will have a lower low now & not when it is confirmed! The probability of a lower low is pretty good IMO. Hence the NYA chart here.
Note the contrast between SPY above and NYA in the previous chart. Deception, thy name is market.
So SPY did make a new high in the current rally but I take that with a small pinch of salt firstly, because my wave counts show this is the last rally possible before an intermediate correction, and secondly, because the top here isn’t confirmed by a similar top in NYA.
SPY closed the week at 165.83. The downside target for this rally is 154, which is the price area of the index’s 200 DMA. I pick that as the target because other indices show the markets long term trend represented by its 200 DMA is going to stressed before the market turns up if it has to. SPY’s previous low though was 156, not very far from 154.
The market will tell us if there is a second leg to the current correction in due course. Beware this isn’t likely to be 1 leg run-of-the-mill correction. So wait to see what happens at 154 before you buy back into the market.
NIFTY closed the week at 5507.85 after turning up briefly from its support at 5473. The index’s 50 DMA has just triggered a long term sell signal on the charts. So barring a minor scuffle at 5450, the index is more likely to cave below towards the 5300 price area where some support exists. However, given the correction in world markets, my sense is NIFTY will in all probability test 4500-4800 range rather rigorously in order to have a robust base for a future rally.
Not the time to catch falling knives. We are most likely towards the beginning of a correction in NIFTY, [in this leg] than towards the end of it.
NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.
Congress revival strategy in Uttar Pradesh
There are enough indications that the general elections to elect the 16th Lok Sabha will be held in the summer of 2014. India has seen fourteen prime ministers, of which Uttar Pradesh alone has provided eight of them. Uttar Pradesh has 75 districts and 80 Lok Sabha constituencies. It has a population of about 210 million and 120 million voters. Thus there is enough empirical evidence to suggest that the road to Delhi is via Lucknow. The chief minister of Gujarat who nurses prime ministerial ambitions has planted his trusted confidante Amit Shah as the prabhari (in charge) of the BJP in UP. Caste has trumped religion decisively especially in the post 1989 Mandal scenario.
Caste Structure in Uttar Pradesh (figures in percentages)
*Dalits include Jatavs, Chamars, Koris, Pasis etc
** OBCs include Yadavs, Lodhs, Kushwahas, Kurmis, Mauryas etc
In this column, I argue that the Brahmins who have been in the political wilderness since 1989 needs to be aggressively wooed by the Congress party. The political revival of the Congress party in Uttar Pradesh rests primarily on getting the Brahmins back into their fold. Uttar Pradesh has not seen a Brahmin Chief Minister since ND Tiwari way back in 1989. The Congress Party has given at least 4 Brahmins as chief ministers in Uttar Pradesh.
Brahmins are faced with a political vacuum and looking up to a party that can give back their self confidence and dignity. However if the Congress party has a five year, forward looking strategy, the homecoming of the Brahmins is a near certainty. The Congress is the only party which has given Brahmin Chief Ministers.
Despite loud proclamations of championing the Brahmin cause, the BJP has never appointed a Brahmin Chief Minister in Uttar Pradesh – witness Rajnath Singh (Thakur), Ramprakash Gupta (Bania) and Kalyan Singh (Lodh, OBC). Both the SP and BSP are programmatically designed to not give the top posts in the party or government to anybody but Yadavs (in case of SP) and Chamars (in case of BSP). While both the BSP and SP are enticing the Brahmins, they can only share power and representation with these parties as king makers, but can never aspire to be kings. The BJP inspite of having a shrewd Thakur in Rajnath Singh as the national president of the BJP are getting the bulk of the Brahmin votes in successive elections. All this can change if the Congress can get its act together.
Why are Brahmins important in the poll calculus in Uttar Pradesh? Brahmins are 12% of UP’s population. Brahmins are facing a leadership vacuum in the state. They are looking for a leader/party that can capture their imagination and can safeguard and consolidate their interests. Apart from Muslims, Brahmins are another community who have powerful oratory skills and are opinion makers in the villages and cities of UP.
The current strategy of the Congress party in wooing OBC satraps like Beni Prasad Verma (Kurmis) is sure to backfire, as seen in the 2012 assembly elections. Narasimha Rao wrecked the Congress party when he frittered away two thirds of the Uttar Pradesh assembly seats in Uttar Pradesh in 1995. He ensured that the Dalits shifted their allegiance enmase to the BSP since then. Post the Babari Masjid demolition, Muslims have also left the party, briefly voting for it in 2009 to keep the BJP out of power.
The Congress was once considered the natural party of the Brahmins. There must be concerted efforts to win back their trust by reminding them of how their fortunes are intricately linked to the fortunes of the Congress party. In neighbouring Uttarakhand, the Congress had a choice of Harish Rawat (Thakur) to be made Chief Minister in 2002 and 2012. However on both occasions they chose ND Tiwari (2002) and Vijay Bahughuna (2012) – both are Brahmins. In Delhi another Brahmin, Sheila Dikshit has been the chief minister for nearly fifteen years.
The Congress must identify an astute Brahmin leader who can tour all the districts of Uttar Pradesh and get these political messages across to the Brahmins in carefully orchestrated Brahmin sammelans. The Congress must pursue this core and committed caste constituency, and the “plus votes” will follow. The original vote bank of the Congress has been a lethal combination of Brahmins, Dalits and Muslims. If Brahmins come back to the party, can Dalits (25%) and Muslims (18%) be far behind?
Get the Brahmins back, rejuvenate the party structure, and the Congress party will see the first signs of a revival in time for the 2017 elections. The people of Uttar Pradesh rejected the Congress in 2012 (in the absence of an organizational machinery in the state) because they were not seen as a credible alternative to the BSP. It is disappointing to see that the Congress scion has abandoned his constituency in Uttar Pradesh, post the electoral reverses in 2012. Rahul Gandhi must lead the charge and be the voice of the Brahmins in Uttar Pradesh. The Congress is bound to be rewarded politically.
MARKET NOTES: A few points for India’s new RBI Governor
India’s new Central Banking Chief, Raghuram Rajan, is no stranger to markets in India and abroad. In fact he was one among those who warned of the banking excesses back in 2007 and what they implied for the credit cycle. So what I say will not be new to him. Nevertheless worth listing out a few things in the Indian context.
- A rally in Dollar is now widely anticipated. Whether it goes from DXY 80 to 85.50 or 89, the change in valuation of other asset prices will be huge. All world currencies will be impacted. $INR has to some extent ANTICIPATED the rally in DXY and wisely so. But an extension to the DXY rally from 85.50 to 89 will be devastating. That has huge implications for India’s exchange rate management. We need to use the crisis to put our exporters on a sound footing. This is not the time for short-term fixes no matter how tempting they are. Let the INR find a sustainable level that keeps potential exporters afloat.
- The surge in the value of the Dollar comes amidst an interest rate cycle that is turning up. That means there will be PE compression across the board in every asset class be it equities or commodities. India has foolishly kept interest rates too high fighting a structural inflationary rise in food prices that were below world prices with high interest rates. That foolishness has tanked the economy & choked banking. At some time the RBI will have to ease interest rates in INR markets against the world trend. That means $INR must account for that fact before hand.
- Tanking equity markets across the world will put unprecedented pressure on equity prices at home. The mess in the coal sector and power sector has clogged banks in cross-defaults. Growth will tank further unless government sorts out the mess in jinxed coal mine privatization & stalled power plants. Unrelated businesses must be insulated from cross-defaults for sometime. Pick up in growth will not be automatic since the fall is not cyclical but also structural. RBI must highlight steps under an “emergency plan” that need to be taken immediately, election or not. There is time.
- FII flows will not dry up if we let markets function normally. We shouldn’t worry too much about the losses forced on FIIs. They understand the inherent risk in equity very well. Let the markets function and weed out those who don’t add value. That is a bit counter-intuitive to lay folks but absolutely essential to attract new money into the market. Industrials who weep over the high cost of Dollar should be told to earn some.
- Don’t curb any import except Gold, that too strictly through punitive duties with a built in 12 month sunset clause. Make the sunset clause credible & builtin so that smugglers don’t invest in beating the system.
Last but not the least, even if NIFTY tanks to 4800, it is not the end of the world. As usual there will be a wall of cash waiting to invest at the right price provided we get the reforms back on rails. If FIIs have lost, their gain loss was a gain elsewhere. So there is no dearth of cash for investment in the system as such. It was RBI who destroyed our $Job economy. It is for RBI to resurrected it by instituting news ways of managing the INR. China is a good place to learn the art from. And yes, get labor reforms through.
Gold closed the week at $1312.20, more or less on, but just under its, 50 DMA. Gold is in the process of confirming its near term bottom at $1179.40 made on 28th June. The metal could move down towards the $1200 price area over the next few weeks. However, the metal is also building a base for the counter-trend rally to follow. So the price will be a tussle between these two underlying trends till the middle of September or so. All told, the metal is now a buy at dips, especially in any crash in risk assets, for a tradable rally to the $1550 price area.
The longterm trend however continues to be bearish.
Silver closed the week at $20.4070, a notch above the metal’s 50 DMA. Silver like Gold, appears to be in the process retesting the low of $18.17 as the new near-term bottom. With the close above 50 DMA, the probability of a dip to $14 now recedes. Silver too will fall in tandem with other risk assets and I would not take $18.17 as a “confirmed” bottom. However the next low by middle of September would be the base from which a decent tradable rally in Silver ensues.
No change in the long term trend which continues to be bearish.
HG Copper spiked to a high of 3.3175, higher than its 50 DMA at 3.16 but below the 200 DMA now positioned just under 3.40. The spike came on higher than usual volumes. My sense is that the spike was just a one-off bear squeeze and there is no change in the underlying bearish trend. One would have to revise that view id the metal breaks above 3.40.
However, barring a fallback to 3.20 to test it as the new support, the short-term trend in the metal is bullish. The metal will most likely reconfirm 3.0 as the new support zone along with other risk assets before moving on. That said, it is the strongest metal on the charts. Anything below 3.20 may be worth accumulating for the long-term.
Brent closed the week at $104.87 after bouncing off its 200 DMA [positioned at $100] over the previous weeks. Brent could rally to $112 early next week but the commodity is all set to retest $100 or even lower over the next few weeks along with other risk assets. I would not bet on the rally’s base trend line holding up either. That said, Brent in unlikely to do anything below $90 and would be a screaming buy in any general commodity price crash.
US Dollar [DXY]:
The Dollar Index [DXY] closed the week at 81.17 after making a low of 80.89 during the week. As mentioned in earlier columns, DXY is in the process of confirming a near term bottom in the 80-81 price area before moving into a Wave V rally that could target 85.50 [at least] or even higher.
I suspect the process of confirming is all but over & will most likely be completed next week. The following Dollar rally could be explosive.
EURUSD has been in a counter-trend rally to test the overhead resistance at 1.34 before heading down again to 1.27 over the next 2/3 months. What we see on the charts is a potential double top at 1.34 that is also reflected in the RSI and Stochastics. The currency pair closed the week 1.33442 after making a high of 1.34 during the week. Barring a possible pull back to 1.34 or even slightly higher, I sense the pair will turn down to head towards 1.27 region over next 2 months. First target for the pair lies at 1.32 which is its 50 DMA price area.
The Dollar broke through the 50 DMA line against the Yen to close the week at 96.20. The Dollar is looking pretty weak against the Yen at the moment and could retest 94 early next week. But as mentioned with regard to the Dollar Index, DXY is in the process of testing a Wave IV bottom close to 80 and in the process the Yen appears very strong. While a trip down to 94 and the 200 DMA is not ruled out early next week, my sense is that the Dollar can launch into an explosive rally any time next weak and so shorts in USDJPY are inadvisable. Expect enhanced volatility in the pair going ahead. I would look to play long Dollar at the pair’s lows.
For a broad perspective on the value of the INR [in USD expressed as cents] I examine the reciprocal of the USDINR chart with weekly prices to see how weak the INR is and to get a sense of where it could go.
INR started it current bout of devaluation/adjustment in July 2011, when its value was 2.3 cents. Yes that’s our INR. Was 2.3 cents; currently is about 1.6 cents. Taking the simplest model, the first Wave A of the adjust took the INR down from 2.3 cents to 1.7 cents. That’s a depreciation of 0.6 cents or a 26% devaluation from the value in July 2011.
In the normal course, one expect the corrective rally B from 0.17 in June 2012 to rally at least to 2.1 cents in April 2013 as shown by the Yellow corrective arrow. The corrective rally got nowhere near that target and grossly under-performed managing to get to just 1.9 cents. To me that is one very important measure of the structural weakness inherent in the INR.
We are in Wave C. How far can that take the INR? Note Wave A took the INR down 0.6 cents. We would expect Wave C to be usually as destructive as Wave A though it can be much more than that. 0.6 cents down from 2.1 cents [the point to which INR “should” have rallied] is 0.15 cents which translates into a USDINR rate of 66.667 to the Dollar. But if you take the “revealed weakness” in Wave B into account, the INR falls from 19 cents to 13 cents giving an $INR rate of 76!
Note these are gross approximations to reality; not reality. So we would expect Wave C to terminate somewhere between the $INR 66 to 75 mark. That sort of correlates to the anticipated move up in DXY from 80/81 level to 85.50 that I think will unfold in the next 2 to 3 months abroad. Note also that every other currency is will take a battering against the Dollar. It is not just the INR.
Raghuram Rajan, the new RBI Governor should clean out the Augean Stables, sort out the mess in exchange management, and start with a clean slate. Artificially propping the INR with stiff short-term interest rates hikes and trading curbs is the short road to disaster. The storms brewing abroad are beyond the control of Central Banks. The wise will profit, others will go down the tube. Export or perish, should be his blunt answer to MoF and Industry. Don’t curb any other import except Gold, that too strictly through punitive duties with a built in 12 month sunset clause. Make the sunset clause credible & builtin so that smugglers don’t invest in beating the system.
I have bad news for DAX bulls. The index closed the week at 8338.31, well below the highest point hit during the week. Far more importantly, the index failed to rise to 8542.92, the high of the last rally. That means the index tips into a correction starting next week with a target of 7650.
We now have to wait and see far down the index will correct. If this move takes the ensuing move takes the index below 7650, we are into the much anticipated intermediate correction already.
There is a small probability of the index pulling a surprise and making a dash for 8550. Use to exit if not done already. The dash will not change anything much. We are headed for the 7650 area in any case.
Shanghai Composite closed the week at 2052.24 below it 50 DMA. That was a huge surprise because the minimum one would expect from such a battered down index at this late stage in the bear market is to at least spike up to its 200 DMA 2170 price area. It could still do that but it is probably too late for that.
What the failure to to rally to 200 DMA implies is that Shanghai too would follow the world indices into another correction which will probably test the low 1850. That then could be the trigger for an intermediate counter trend rally within a bear market.
NASDAQ 100 [QQQ]:
QQQ [a traded proxy for NASDAQ 100] 76.49. Nothing on the chart says it will not go on to make a new high during the course of next week. It probably will. But the advances are coming from poor breadth, poor volumes and from suspect sources. For instance, main line technology counters such as IBM are already in decline while stocks such as Apple propel the index via counter-trend rally within a long bear trend. Those are warning signs of an impending correction if not worse.
Note the failure in Shanghai and DAX, two of the major overseas markets have in all probability already slipped into a correction. So be warned. A big move down to 68.90 on QQQ awaits. And that is the minimum target. If the rally from there disappoints or if the market overshoots it, we are headed down for a long while.
S&P 500 [SPY]:
A new high on SPY, albeit not very far from 171, can’t be ruled out. Its value to bulls will be rather symbolic. And then a correction down to 156 or thereabouts should follow. If the market overshoots 156, we have an intermediate correction. If it falls short, the bull market remains intact. There is no way to tell apriori what will be the outcome. Volume, breadth, stocks in the indices, declining number of new highs all point to an intermediate top but time alone will tell.
NIFTY continued it correction by knifing through one support after the other. Even the long-term trend line support in place sine 2003 was taken out and that has major implications for the NIFTY.
The above is a weekly chart of the NIFTY to put the current correction in perspective. If my wave counts are true, [these are counts that have worked well so far] we are into the last stages of a correction for stocks that peaked in November 2010 [ not January 2008] and these stocks comprise such things as private & public sector banks, finance companies, consumer staples, technology etc that make up some 50 to 60% of the NIFTY’s market capitalization. The chart makes it clear we are in the initial stages of a giant C wave [this is a weekly chart] whose target would well be to retest 4800. That’s huge bear move ahead.
Note the move is coordinated not only with Emerging Markets but also the world’s leading equity markets. So the compression in PEs will compound the problems from a fall in value caused by declining profits. Worse, both will happen in the context of a tightening money markets world wide amidst an interest rate cycle that is turning up. Not to mention a general election that for once is questioning fundamental assumptions. I doubt if India has seen such a correction in its history before.
MARKET NOTES: The US Dollar could surprise with a massive rally.
Commodity markets having been marking time waiting for the equity markets to complete their rallies before they make up their minds. The currency markets are clearly anticipating a market sell off in equities that sends Dollars racing back to the safe harbor of US Treasuries. If the scenario comes about, a huge robust Dollar rally will force every other markets to find its new level in relation to it. That also means commodity markets will finally show us their final support. Those sitting on cash will have ample opportunity to stock on the best goodies. So don’t be afraid of cash no matter what pundits tell you about negative real interest rates.
A surging Dollar will put extraordinary pressure on RBI and the INR. RBI may be prepared to battle on till DXY gets to 85 but I suspect the true target is 89. Not sure what RBI’s reaction to $-INR at 70 will be. RBI had ample warnings of the fiscal & CAD deterioration. It had also ample warning about INR being over-valued. Instead of actively making markets & guiding them higher or lower to effect smooth change it slept and then woke up in a panic. RBI must understand markets are always made, they do not just happen. If RBI will not do it some other foreign bank cartel will. The only difference is that the cartel works for its own profit and RBI loses control over the market. So please learn to make markets; and money. The days of central banking by administrative fiat are over. Dead. Gone.
NIFTY is delicately poised on the neckline of a large inverted S-H-S with a target of 5000 from the neckline of 5600. That’s the good news. The bad news is that there is no rule which says the fall will stop at the target. All it says is a bounce then results. There could a short bounce before the neckline is breached to the 200 DMA area. But in all other respects NIFTY has decided not to wait for world markets to tank.
Hoard cash. There will be plenty of time & opportunity at far lower level than these.
Gold turned down from the overhead resistance at $1350 and closed the week $1310.50. Gold hasn’t retested its new support at $1170. Furthermore, wave counts favor a retest of the 1150 price zone before a tradable rally ensues. My sense is that, barring minor pull-backs from time to time, Gold will drift towards $1150 by the middle of September.
That should give RBI some breathing time in managing gold flows into India.
Silver pulled back on Friday from a low of $19.185 to close the week at $19.912. As discussed last week, Silver is yet to find a credible area of support and my sense is that it will hit the $17 area by end of August. I don’t think that would be the end of Silver’s bear market though we may get a rally of sorts from that area.
As expected Copper continued to consolidate within a trading range above its recent low of 2.98 and the overhead resistance at 3.20. There may be a change of bias over the next few weeks from up to down but expect Copper to tread in the same trading range for some time more.
Switching over from tracking WTI to Brent from this week. Of the two, Brent provides a clearer picture of the international price movements without getting overwhelmed by temporary pipeline logistics in the US domestic market.
The basic wave counts haven’t changed because of the switchover though quite a few the “anomalies” in prices have got ironed out. Brent, as WTI Crude, is in counter-trend rally from the low formed in June 2012 and that cycle appears to be coming to an end in August. The extent of the next leg down will tell us if the correction in crude prices is over or there is some more consolidation ahead.
Brent could shoot for $120 over the first two weeks of August before turning down for a correction. The structure & extent of the next correction will tell us where Brent is headed over the medium term. Exit at rallies.
US Dollar [DXY]:
DXY closed the week 81.978 after bouncing off its 200 DMA at 81.59. The correction in the DXY from the top of 85 is almost over barring a retest of 81.50 before the next rally back to the 85 region and possibly beyond that.
This blog being all about technicals, I won’t venture into discussing the expected correction in equities, the consequent sell off and search for yields in the US bond markets. But one thing is clear. A positive real yield in bonds, backed by some GDP growth, is available only in the US and that’s gonna make inflows in Dollar assets a given.
A resurgent Dollar will rip thru commodity markets, and equities of course. Nothing will be left untouched. So the question is will the rally extend beyond 85? My sense is yes given the extent of correction we saw in wave 4 that is just ending. Humongous volatility ahead.
The EURUSD rally from the recent bottom of 1.27540 was completed at 1.3300 and we may be headed back to retest of 1.27 by end of September.
The pair closed the week 1.32810. The decent to 1.27 will be paced by the DXY and the extent of sell off that we see in Europe. Likely to be a very volatile trip down with vicious counter-trend rallies.
USDJPY closed the week at 98.93. Having made a low of 97.67 the pair is now headed up with a first target of 101.50 followed by another overhead resistance of 103.65. My sense is the pair will follow DXY up over the next two months.
The $-INR corrected down from the top of 61.21 as expected towards the INR 59 area making a low of 58.68 during the week. The pair’s 50 DMA is at 58.65. Bouncing of the 50 DMA the pair was back to 61 in double quick time closing the week at 61.09.
We could have another leg of a correction down to 59 area from 61 over the next few days but the major trend remains up and a target of 62.50 looks close at hand.
$-INR cannot remain immune to the strengthening the overseas Dollar where I expect the DXY to rally from 81 to 85 [an up move of 5%]. That makes for a $-INR of 64 just [based on a buy in Singapore & sell in Mumbai model.] Of course reality is much more complex and some of the move from 81 to 85 is already in the price. Even so expect an correction to be short & fleeting while the $ trends up to test new highs.
RBI’s real problems will begin if the US equity markets tip into a deeper correction than 10% and the DXY shoots beyond 85 to 87 or even 89. The 87-89 is not ruled out. If you remember I had set my target for DXY for this full rally from 72 ay 89. And that appears well within reach.
RBI’s trading restrictions may help it manage the politics but the consequences for its credibility as a Central Banker are not worth contemplating. RBI was sleeping at the helm.
No surprises from the index. It is proceeding in a very orderly fashion towards its target of 8545 which it should hit by Friday, next week. The probability of a substantially higher high than 8550 is rather slim though always there. But it is unlikely to be so high that it rules out an intermediate correction as explained before. Execute exit plans and wait for the next correction to unfold & set direction.
Nikkei bounced up from its 50 DMA in the 13500 area and closed the week at 14466.16. The bounce is unlikely to last though it could stretch upwards 15500 as Nikkei plays catch up to the rally in US markets for the next week.
To my mind, Nikkei remains in a downtrend from the top of 16000 and the downside target, in tandem with other world markets, could be well below 11500. So the next rally in Nikkei is best watched from the sidelines.
NASDAQ thru QQQ:
QQQ [Techs in Nasdaq] pulled no surprises and proceeded in a an orderly fashion to to the target zone of $78. The uptrend has another week or 10 days to exhaust itself. The possibility of an overshoot beyond $78 exists but many key technology stocks are already into an intermediate correction following below expectation results. So yes, we could overshoot but not by much.
And if QQQ just meets target or marginally higher the probability of the following correction being deep enough to tip the market into an intermediate correction is very high. Exit and move to the sidelines. Avoid shorts till we are close to 16th August or we clearly have a top in place.
S&P 500 or SPY:
Like QQQ, SPY showed no surprises moving towards its target in an orderly fashion. Price versus volume divergences on both QQQ and SPY are pronounced but something you would expect at an impending top. SPY has a target of 175. It closed the week at 170.95. Clearly a long way to go with about 2 weeks to get there. The index is not even very overbought at this point.
Could SPY at $175 or better obviate the need for a longer term intermediate correction? It is a close call. SPY tanked from a high of 165.55 in the last correction to a low of 156 or 9.55 points. On the other hand, it has added only 4 points to the top of the previous rally and could add another 5 before it pauses for a correction. So we have 9 down – 9 up. Too close to call at this point.
Shorts not advised at this point but overall exist all long positions before 16th of August and wait patiently for a correction to sort out the market direction.
NIFTY was the real surprise of the week. First, it failed to make for the top of its trading range at 6240, stopping well short of it at 6065. Next on the way down, it took out both its 50 and 200 DMAs without a pause. Lastly the 3 recent tops at 6075, 6200 and 6075 look like inverted S-H-S with a neckline 5650. The Index itself closed the week at 5677.90 more or less at the neckline. That’s a pretty unusual run of events and the prognosis can’t be encouraging for bulls.
In the normal course, I would expect a respectable pullback from the neckline at 5650 to the 200 DMA before taking another shy at the neckline. I don’t think the neckline will hold for long and that gives the NIFTY a target of 5000. That would also more or less complete the correction in NIFTY in tandem with the world markets. Of course the process will take time.
MARKET NOTES: The US Equity Markets Are Approaching An Intermediate Correction
There was nothing in the markets to challenge the prognosis of last week that indicated that the markets are likely to tip into a long awaited intermediate correction. The price-volume divergence clearly visible on the QQQ and SPY charts in this blog clearly indicate that equity markets are not only going up in price on progressively thinner volumes but also that the volume on down days is higher than on up days. Such divergences usually presage a market top and are indicative of distribution.
The currency markets saw no surprise either. The Dollar continued to correct down in an orderly fashion and currencies such as the Euro and the Yen went up correspondingly. That helped quell the panic the the $-INR market. However, DXY is unlikely to correct down any further than 80.50 and the longterm rally in DXY is far from over. Expect the DXY rally to resume in the 1st or 2nd week of August. That will almost certainly pressure the INR in the Indian market.
Commodity markets saw a dead cat bounce from near-term bottoms and are likely to correct in line with other risk assets as equity markets tip into an intermediate correction. At the moment, all appears set for across the board test of risk asset prices versus the Dollar in an intermediate correction that begins second week of August. It is something fraught with interest and will set the base for the next market cycle.
I would exit all trading position across all asset classes and dive into the US Dollar for now. Avoid shorts until a top is confirmed in DAX followed by SPY. Incidentally, Nikkei may have already tipped into an intermediate correction unless it rallies to make a new top early next week; an unlikely event.
Dollar is king in an intermediate correction!
Yield on 10 Year Treasury Notes:
The yield on 10 year Treasury Notes continued to consolidate below 270 basis points but above 245 bps. The yields could test the 225 bps level in the coming weeks as the US equity markets go into a correction.
Gold continued its counter-trend rally and made a high of $1347.21 during the week pretty much achieving it target for the rally. Gold closed the week at $1321.50, just a touch below its 50 DMA.
Gold needs to correct down to the $1200 to $1250 area before rallying further. Over the next week or two, expect Gold to retest support in the $1250 area. On a successful test, we could see Gold continue its counter-trend rally to $1350 or even beyond to $1550 area.
Note the bottom at $1179.40 hasn’t been retested yet and a further rally is unlikely before that is confirmed as a near term bottom.
Silver closed the week at $19.7710 just a notch below its 50 DMA $20.89. Although Silver had rallied from its recent low of $18.17, I am not sanguine that we have seen a near term bottom in Silver. My wave counts show that Silver could dive under the $20 level to as low as $14 before finding meaningful support. Continue to be bearish in Silver with extreme prejudice :p
HG Copper closed the week at 3.1055, well below its 50 DMA at 3.1968. My sense is that the correction on Friday in the metal was just a day or two of correction before the counter-trend rally resumes its march to the 3.40 area on the charts.
That said, I don’t think the full longterm correction in Copper is over and the metal would drift lower with other commodities after testing the overhead resistance at 3.40.
WTI Crude closed the week at $104.70. Crude has been in a short term correction since making a high of $109.32 on 19th July. My sense is that Crude could correct down to $102 area to test support before rally back to $111 or thereabouts in line with the rally in US equities and other risk assets.
However, I don’t think the $111 price will sustain for long and WTI crude will also correct down with the US equity markets, possible from the end of second week of August. The next flare up in crude price should be used to exit longs.
US Dollar, DXY:
DXY closed the week at 81.764, just above is 200 DMA 81.50. As suggested last week, DXY is in wave 4 correction from its last top at 84.485. This correction had a target of something between 81.50, its 200 DMA and the support at 80.50.
My sense is that DXY could test 80.50 over the course of the next week and upon finding support there, is likely to shoot for its final target for this long rally to 85.50 or higher.
Clearly, DXY shooting for its previous top or higher will have grave implications of the $-INR market in India as well.
EURUSD closed the week 1.3278, well above its 50 and 200 DMAs. Incidentally, the 50 DMA has just triggered a buy signal on the Euro.
My target for the counter-trend rally now under way in the EURUSD was 1.3450. We could see the currency pair shoot for that level next week before it consolidates around that level. Not bullish on the Euro beyond 1.35 at the most.
USDJPY closed the week at 98.25. The wave counts I favor show the Dollar in a “C” wave down from the top of 101.50 with a target of 94 or so. Clearly the Dollar is correcting down in the Yen markets in line with Nikkei. Its an upside-down world out there!
However, maintain my view that the longterm prognosis for the Dollar in the Yen market is still bullish and the top of 103.50 for the Dollar will be taken out over next few months. Meanwhile, ride the Dollar down to 94.
Had indicated last week that the Dollar would correct downwards and consolidate below 61, it recent high, and its 50 DMA which is currently in the 58.50 area. The USDINR 200 DMA is way below in the 55.50 area.
Expect the consolidation in the Dollar to continue. First support for the Dollar lies at 59 and then again at the 58.50 area. The Dollar could correct all the way down to 57 as DXY tries to find a bottom around 81.50.
However, the respite from the Dollar’s longterm bullish trend up to 85.50 or beyond, is likely to be very short-lived. I expect the Dollar to be testing 61 again in another 3 to 4 weeks time. Maintain my target of 63.50 for the $-INR by the end of 2013.
No real change in the prognosis from last week. DAX made a high of 8379.11 during the week before correcting down and closing the week at 8244.91 just above its 50 DMA.
DAX remains on target to hit 8550 or better by 9th August. After that expect a correction is due in the normal course but keep in mind that this could be the beginning of the long-dreaded intermediate correction that could last a many months.
I would exist all trading positions at the next rally up that takes the index beyond 8550. In any case, I would exit all trading positions a day or two before 9th August if not earlier!
I had expected the counter-trend rally in Nikkei from 12,435 to at least reach for the previous top of 15962. However, the rally topped out 14,589.91 on 19th July a key reversal day, whose importance I duly pooh-poohed last week! Such is life
The revised wave-counts favor a drop in the Nikkei back to 1150 area in a an intermediate correction that could last till the end of 2013. Nikkei appears to have been the first major world equity index to go into an intermediate correction.
However, the longterm charts remain bullish and the rally from 700 levels on the Nikkei is far from over.
No change from the last week’s projection. Shanghai remains on target for a counter-trend rally from the low of 1850 to 2200 area. However, no bets on the index after that as it is likely to correct along with the rest of the world markets though not as savagely as some of them.
Russell 2000, RUT:
Again, no change in the scenario from last week. The index corrected mildly after hitting a new high of 1056.86 on 23rd July and remains headed for a target of 1090. I would rather watch SPY than rely on RUT for a sense of the direction of the market. But the index does give a clear sense of the froth building up in the US mid-cap space.
QQQ is used here as a proxy for the NASDAQ Tech space.
NASDAQ Composite closed the week at 3613.16 corresponding to $75.37 on the QQQ chart. The composite index is on course to hit its target of 3650 on the charts.
There are many indications that we are approaching the end of this rally before an intermediate correction sets in starting from the 2nd week of August. The clearest divergence is between the volume and the price on the QQQ chart. QQQ is not only trending up on thinner & thinner volumes but the volumes are relatively higher on down days.
I would exit all trading positions and move to the sidelines for now. Shorts should be established only after a top is confirmed.
S&P 500 using SPY:
S&P 500 Index closed the week at 1691.65 corresponding to 169.11 on the SPY chart. The high of the two stands at 1692.39 for S&P 500 and 169.24 for SPY.
The divergence between volume and price on SPY chart is fairly clear. Like QQQ, SPY is also going up on thinner & thiner volumes and volumes on down days exceed the volume on up days. The divergence warns of an approaching reversal.
The wave counts indicate a correction setting in second week of August that could tip the market into an intermediate correction. It is hard to see SPY shooting so high from here to a new top that the next correction would not take out 1550. If it did, the following rally would not likely make a new high flipping the market into an intermediate correction spanning many months. Wise to exist all trading position over the next 2 weeks.
SQQQ is essentially a leveraged short position in the QQQ share representing the tech space in the NASDAQ Index. It mirrors the QQQ diminishing in value as QQQ goes up in value. A bottom in SQQQ indicates a top in QQQ.
Can SQQQ bottom before QQQ tops out? In theory the answer should be no but it is possible that people hedging longterm portfolios create a higher bottom on SQQQ than justified by the value of QQQ alone.
The point about the chart though is in the volume versus price. Note the explosive increase in volume as SQQQ approaches a possible bottom or conversely a top in QQQ. The insider, informed, long-term investor sentiment that would likely hedge exposure here in SQQQ is overwhelmingly bearish as indicated by the cash flow on high volume days. It sort of confirms the price volume divergence in both QQQ and SPY.
NIFTY surprised by turning down sharply from 6093.35 following some pretty poor results in key stocks like L&T and a string of PSU banks. NIFTY closed the week below its 50 DMA IN the 5900 area at 5886.20. It is just a notch above its 200 DMA in the 5850 area.
It is hard to see NIFTY falling much below 5750 before rallying up again. Which is not to say that one is bullish in the NIFTY. It is just that the rally from recent low of 5550 is not yet complete & there has to be another leg to the pullback that could stretch the index to 6250 as envisaged in this blog last week.
On a technical rally to 6250 from 5700, one could see NIFTY tip into a longish correction that rakes us to the end of 2013 along with the world markets.