MARKET NOTES: Gold edges towards the end of a correction

MARKET NOTES:  Gold edges towards the end of a correction

 

Gold [GCQ2]:  As blogged in the recent past, gold is heading towards the end of its correction from its recent all time high of $1920 made in June.  The last leg of a correction is usually marked by sharp rallies and equally sudden drops as short covering sets in.  We are seeing that happen in gold.  After making a low of $1531, Gold flared up to $1640 and then fell equally sharply to $1561 before closing the week at $1593.  We can expect such volatile movements to continue till the middle of July.

Most position traders would have covered their shorts at $1550 as advocated in my blogs.  The question really is should one go long in gold here and if so at what price levels.  If Gold doesn’t breach $1520 over the next few days the probability of a crash in gold below that level recedes.  As always it’s difficult to predict how the cookie crumbles.  Position traders could start slow accumulation in the $1560 range with a stop loss below $1520. The risk of a breakdown in Gold price to $1430 remains. However, the price action in gold indicates that the risk of such a breakdown in receding with time.

This is not to imply gold has turned bullish.  That will happen only when it breaks atop $1920.  All one can say is that the metal will try to aim for a pull back to the previous top over the next several after the correction.  Its price action as it attempts to do so over several weeks will tell us where it intends to go.  This commentary is merely flagging a trend change that appears imminent in the metal.

 

$-Index [DXY]:  The Dollar has had a great bullish run from the 78.5 region in April this year to its major resistance at 83.65 on 31^st May.  Since then it has been consolidating in a range between 82 [which represent the top of its last rally in January] and just below 83.5.  The rally is by no means over.  The ultimate target of this Dollar rally could be as high as 90.

DXY closed last week at 82.56.  The consolidation between 82 and 83.5 could continue for a while before a breakout.  I remain bullish on the $.  Furthermore, the bullishness in the $ may have major implications for the INR.

 

WTI Crude [CLN2]:  Crude closed the week at $84.34.  As indicated in the last blog post, crude in an intermediate decline with a target of $75 but is consolidating between $81 and $86 for the time being.  Crude could pull up next week to even as high as $90 for a short while before the final plunge to the $80 region.

As warned before, in my view crude is merely correcting for the bull run from December 2008 to May 2011.  By that wave count, we are in the last leg of the wave C correction in crude with a target of $75.  Wave C could terminate as early as end of August.

As mentioned in my last blog post, India would be foolish to bank on the falling crude prices.  It has a small window of opportunity between now and end August to reform its oil sector if it wants to with minimal market disruption.  Whether or not it grabs the opportunity is up to somnolent & moribund government that simply isn’t alive to markets and market trends.

 

Silver:  Silver closed last week $28.47.  It appears on course to test its first target at $26.  The metal could rally over the next week and exhibit violent price movements in tandem with Gold.  However, the long term picture remains bearish and the price movements in the metal will be more towards $26 than away from it to the top.  Continue to be bearish in the metal.

The probability of a price breakdown below $26 appears to be receding for now.  After hitting a low in the region of $26 by end July Silver could see a rally in tandem with gold and the future price action will depend on whether the metal can make a new high in the months that follow.  Net net, bears should look to cover shorts in the $26 region.

 

Euro-$ [EURUSD]:  Euro made a low of 1.2286 against the $ before rallying up to 1.26 last week.  It dutifully turned down from 1.26 to close at 1.2516.

The Euro has now entered a crucial period that will end at the end of July much like Gold and the $.  Its first price target now is $1.18.  Expect the Euro to be rigorously tested against the target of $1.18 be fore a substantial rally.  I remain bearish on the Euro.

 

$-INR :  The $ is consolidating in the 54.5 to 57 range and this consolidation is likely to continue for a few weeks more before the $ attempts to make a new high against the INR.

Long term the $ can move in one of the two ways.  My preferred view is that the $ moves to make a new high in the 58 to 60 range over the next few months, rising in tandem with DXY in the international markets.  Recall DXY, THE $-Index can test 90 [as compared to 82 now] over the next few months.  Following the new high, the $ then could see a multi-year consolidation in the 60 to 50 range.

The other scenario is for the $ to break the floor at 54.5 and consolidate between 56 and 50 before moving up against the Rupee.

The anticipated moves for the $ in international markets favor the first scenario.  Furthermore, RBI too should favor the first scenario as a matter of strategy with a view to minimizing its outflow of reserves at this point when BoP is considerably strained.  That choice will also help stem gold imports as gold once again turns bullish in international markets.

 

S&P 500 [SPX]:  The US index [SPX] closed the week at 1325.66 after making a low of 1267.38 on 1^st June.  With this move SPX has entered a consolidation zone and a breakout from either side of the 1270-1340 will determine the ultimate direction of the US markets.

Watch the consolidation carefully.  Usually breakouts from such consolidation zones are in direction of the main trend which remains down.  Nevertheless, a full pullback to top of the range at 1430 cannot be ruled out.  Remain neutral with a bearish bias until the market breaks either way.

 

NIFTY:  Nifty made a low of 4831 during the week before pulling up and closing the week at 5068.  In my view the Nifty is highly unlikely to breach the overhead resistance at 5160 though it could continue to stay at the higher end of the trading range before heading down again.

Nifty too remains firmly in a downtrend until a decisive break of the overhead resistance at 5160 takes place.  The first target for the downtrend remains 4750 followed by a deeper target at 4350.

As mentioned last week, this the fag end of the correction in the Nifty.  So while the markets will undoubtedly fall, they will also present buying opportunities.  So research your buy lists.

 

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.