Home > Uncategorized > Market Notes: 29th November 2011: US markets may remain bearish.

Market Notes: 29th November 2011: US markets may remain bearish.

Market Notes: 29th November 2011

It is always hazardous to call market bottoms or tops.  Few can get them right.  Nevertheless, it always useful to see how the market reacts to certain areas on the charts that are potential turning points.  Market action in such areas throws up useful clues to where they are headed.  In that spirit, let’s look at what the market are trying to tell us.

Shanghai Composite:

2300 has emerged as a clear area of strong support for the Chinese markets despite all the negative news flow from China on currency, tightening credit, bubble in the property market and rising labor costs.  2300 on the Index represent a top last seen in June 2001, which was crossed in December 2006.  The area has been tested twice, first in June 2010 and then again in October 2011.  This is the third test for the level in progress with the Index poised at 1370.

The Chinese markets have been correcting October 2007 and we are the 2300 area for the 3rd time after a correction of over 4 years.  The probability that the floor at 2300 will be breached is very low.  On the other hand, on finding a floor at 2300 or higher, a tradable rally to the 3000 area is a likely prospect.  I would therefore be accumulating at these levels.

US Dollar Index:

The Dollar Index is currently poised at the top of its recent trading range between 73 and 80.  Wave counts indicate that the Dollar Index is in a downward correction from the top it made at 88.5 in June last year.  We were in a corrective B wave from the recent low 73 made in May 2011.  That B wave up may have exhausted itself at 80 and a downward move over the next few months could now unfold.

On the short-term charts, the $ Index has probably made a double top at 80.  A 5-part impulse wave down to the 72-73 areas should now unfold.  The $ Index is now distinctly bearish and this has implications for the US equity markets that are negatively correlated with the $ Index.  It will also have a profound impact on the INR-$ equation.  Note the move will take months to unfold though the initial fall could be fairly sharp.

$-INR:

As blogged earlier, the Rupee retested the 52 levels on the charts, something it had last touched in March 2009.  It has breached the level significantly but the $-Index is now telling us a different story.  While, there is nothing on the horizon that would provide an impetus for the Rupee against the $ unless the equity markets pick up, the $ itself would be weakening significantly against other currencies over the next few months.

On the charts, the Rupee needs to consolidate before making another decisive move on way or the other.  Considering the moves in the $ Index, one would hazard that the INR should consolidate between 49 and 52 over the next few months before it makes up its mind to move either way.  A move beyond 52 in the near future is more or less ruled out, although there have been rumors that the Govt. would like to see level of 58.  Unless my reading of the $ Index is completely wrong, 58 looks highly unlikely in a depreciating $ environment.

Sensex:

As anticipated by this blog, the Sensex has bounced sharply from the 15,500 levels that were tested between August and November no less than 4 times.  15,500 has thus become an important floor for the market that has withstood the most adverse of news flow on the breakup of the Euro.  That floor is unlikely to be breached in any move down.

However, on the wave counts, the Sensex has invalidated my wave count by making a lower low 15,479 on 24th November.  As always I prefer the market to resolve such contradictions rather than impose my views on it.  Sensex has an important overhead resistance at 17,200.  Once it crosses that, the wave counts will resolve themselves.  Until then, one wouldn’t add to long positions but continue to hold those bought in the panic since the floor of 15,500 limits any downside.

US S&P 500:

A breach of 1220 has invalidated my wave count on the S&P 500 and I noted by being stopped out.  So it is back to the drawing board to see what the markets are trying to tell us.  It is a mixed picture.  An alternate wave count suggests that the US markets may continue to be bearish till the end of June 2012.  By this count we are in complex upward correction to the fall from 1365 in Feb. 2011 to a low of 1115 in early October.  This move up could have some time left to play out and retest the 1300 area but is likely to lack conviction.

The probability that we will see the 1000 level on the S&P by June 2012 is now pretty much on the cards.

The bearish pattern unfolding in the US markets implies that both Shanghai and the Sensex could go flat and dead with declining volumes while not breaching their respective floors.  History for the Sensex favors such a scenario.  Overall, one should wait for a bit more clarity in the markets before committing significant capital.

Gold:

 

Spot Gold is now correlated positively with risk assets.  Despite making a deceptive series of higher bottoms since its test of $1600 in September 2011, Gold looks distinctly bearish.  A breach of $1680 will be the first indication that Gold is head to a retest of 1600 levels.  The first logical target for Gold looks like $1550.

Only a move past the double top at 1800 would negate this view.  Position traders can carry their shorts with a stop loss just about the $1800 till January next year unless 1550 is reached earlier.

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.

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