MARKET NOTES: It is a global synchronized downturn for the worse

MARKET NOTES:  It is a global synchronized downturn for the worse.

 

 

Using Russel 2000 [^RUT] as the proxy for US equity markets, one may note that the index crossed below its 200 DMA on 16^TH May when the moving average was 780.  After breaching the 200 DMA support, the index fell to its first significant support at 750 and rallied from thereon 21^st May.  The rally tested the 200 DMA from below, observed it meticulously as a major overhead resistance and fell back.  Last Friday, after falling away from the 200 DMA, ^RUT breached the first major support at 750, [which had held last time] and closed at 737.42.

 

Two things fall out from the above analysis.  As the Russel 2000 represents a broader universe of stocks than the S&P 500, its decisive move below the 200 DMA signals a broad bear market for equities in the US markets.  Secondly, while the oscillators do not indicate an unduly oversold market, stocks have been declining since 26^th March and are towards the fag end of an impulsive move down.  Considering the easy breach of 750, one could expect stocks to decline further to test the ^RUT 705 support level before consolidating for a period of time in the 705-750 range.  So while the markets are bearish, fresh selling from traders at this point is avoidable.  Look for opportunities to cover shorts and to reinstate them later at higher levels over the next few weeks.

 

All markets and asset classes are positively correlated now.  I think people seeking a place to hide will be disappointed.

 

 

Gold:  Gold surprised everybody this Friday, not by its rally, but by the extent and strength of the rally.  In the normal course, a pullback to $1600 was on the cards before another attempt at breaching $1520 floor.  Most traders would have put in trading stops at $1620 or $1625.  Gold closed the Friday at $1625.64 after making a high of $1629.41.  That’s a clear warning to small traders to clear out of the market and let the big boys fight it our between themselves.

 

On the other hand, note that Gold did not seriously breach its overhead resistance at $1625 on a closing basis.  Further, in terms of my wave counts, while we are the fag end of the fall from $1920, in terms of time, there is at least a month before a substantial pullback in gold falls due.  Lastly, the daily oscillators are flashing gold is over-bought at this point.

 

The spike in gold coincided with spikes in the DXY, EURUSD, Silver markets and looked more like a device to shakeout weak bears than a serious attempt at a rally.  There would have to considerable base building in gold at around $1500 or lower before gold can show a sustainable rally.

 

I would rather wait to see gold fall back and confirm a reversal in price trends rather than treat the spike in price as something serious.  Not bullish in gold still.

 

 

WTI Crude:  Must confess; have stayed out of the market all thru the fall in Crude, February onwards.  Will wait till market reverses from $75 before reentering the market.  But for those in the market, here is my read on the charts that till now left me confused.

 

To my mind, the fall in crude prices is a correction for the rise in crude from $32.64 in January 2009 to $114.18 in April 2011.  If so, that makes for a textbook bullish “cup & handle” correction. The target for the last leg of the correction is $75.5 followed by a deeper floor at $70.

 

Indian readers, and the few in RBI who read this, may note two things about this correction.  Firstly, the fall in prices is a “bullish correction” to previous rallies.  The uptrend in pries will resume quite sharply once the correction is over.  Secondly, the time cycle analysis indicates that the correction will not last; repeat NOT LAST, beyond the end of September 2012.  So please don’t bank on the fall in crude prices.  Instead grab this opportunity to reform the oil sector.  You won’t get another chance once the big WAVE III comes into play.  The recovery in prices after a WAVE II correction is sharp, swift and leaves you gasping to understand what happened.  You have been warned.

 

 

Silver:  Silver chart illustrates why I find the spike in gold price spurious.  Silver has followed gold pretty closely since it made a low of 26.73 on 16^th May 2012.  The spike in Silver on Friday did not stretch into its 25 DMA which sort of caps short-term rallies in the metal.  In terms of wave counts, I think Silver has still some time to go before it completes its wave 3 and that should be followed by a wave 5 as well.  Hence the floor $27 can be expected to give way some time over the next few weeks.  Not bullish on Silver.

 

 

$-Index [DXY]:  DXY made a high of 83.67 on Friday before closing at 82.9730.  I had anticipated a pop to 84 in the blog. The day could also count as a key reversal day indicating a halt in the price trend for some time.  In any case, the $ needs to consolidate here for a week or so before resuming or setting a new trend.  Such consolidation will have a first floor at 82.5 followed by deeper floor at 82.  A breach of 82 will signal a significant trend reversal.  Not bearish on the $ save for the anticipated correction.

 

 

$-INR:  I had anticipated a range extension for the $ from 54.5 to 57.5 with first stop at 56.5.  The $ made a new high of 56.34 during the week, signaling we may still see 57.5 over the next few weeks.  For the moment, the $ is likely to first test its new floor at 54.3 to make sure of the bottom of its new trading range.  One can expect range bound trading within the band of 54.5 to 57.5 for perhaps a month or two before rising crude prices trigger another round of weakness.  Government may be underestimating what markets have in store for India.

 

 

EURUSD:  The Euro$ [EURUSD] closed at 1.2432 after making a low of 1.2286 and a high of 1.2432, all in the same trading day.  In my view, the spike is without much technical significance except as a part of some coordinated move by professionals to shake off the crowd of day traders who entered the market late.  The spike would have wiped them out but has little to do with long-term trends in the Euro.

 

The Euro breached its long held strong floor at 1.26 on 23^rd May and decisively confirmed the breach two days later.  Since then it has been in a free fall and, considering the velocity of the fall, the spike on Friday was not really trend altering in any way.  EURUSD first target now lies at 1.2150 followed a deeper, far more significant floor at 1.18.  The downtrend could resume next week itself after a day or two of consolidation.

 

The time element in the EURUSD charts is unclear.  On one reckoning, the Euro could ends its fall at 1.18 or thereabouts and turn up from there.  A more bearish view would send it all the way to parity with the Dollar over a longer time frame.  Which of the two ways the cookie crumbles will be known only by the EURUSD price action around the 1.18 to 1.20 region.  Needless to say, continue to be bearish on the Euro.

 

 

Sensex:  The Sensex rallied briefly to its 25 DMA at 16,440 before turning down.  It closed the week at 15,965.16.  The index is getting ready to test the previous bottom at 15,126 during the ensuing week or the next.  The bottom at 15,126 may not be breached at first attempt and the index could bounce from there.  But the time element indicates the test of 15,126 will not be over after the first attempt.  I would be surprised if the support did not give way.  Price action around 15,100 will provide some clues to the ultimate target on the Sensex.

 

Would I recommend accumulation at this stage?  The answer is no.  The cats & dogs that most retail investors buy as “investment” may be near their lows if you take their previous highs into account.  But the question is would you be prepared to hold such dogs on a further 50% decline amidst all the doom & gloom?  Most investors dump them on further declines.  Second, the blue chips that you should buy as prudent investor usually fall towards the fag end of the down turn.  That’s what takes the index down finally.  That may not have happened as yet.  So my advice would be to do your homework.  Target a select list of 15 blue chips; see their charts for previous lows.  Make a reasonable assumption of where you expect them in a crash and buy them when you see those prices.  Buy and hold.  Unless you are professional trader, that’s the best way to beat the market.  Buy the utter doom and gloom but only in blue chips tested by time.

 

 

S&P 500 [SPX]:  SPX has broken an important floor at 1290 to close the last week at 1278.04.  For general commentary on US stocks please see the write-up on ^RUT above.  This is specific to SPX.  In my view the index is likely to test 1260 next week before consolidating a bit and continuing towards 1100.  Indeed 1260 may not hold for long.  Note, SPX has decisively fallen away from its 200 DMA area and that means long-term sellers will be eager to get out of the market.  Second, the NYSE signaled a “death cross” during the week as I had predicted last week.  NYSE Composite comprises all the stocks listed on the NYSE.  So when it signals a death cross, other narrower indices should follow sooner or later.  ^RUT is very close to death cross which could be triggered next week.  SPX and DJIA could take a week or two more, but the direction should be clear.

 

 

One other point may be noted. All risk assets are correlated positively.  There are no exceptions – not even gold or crude, Iran or no Iran.

 

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.