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MARKET NOTES: The US Equity Markets Are Approaching An Intermediate Correction
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 $-INR market. However, DXY is unlikely to correct down any further than 80.50 and the longterm rally in DXY is far from over. Expect the DXY rally to resume in the 1st or 2nd week of August. That will almost certainly pressure the INR in the Indian market.
Commodity markets saw a dead cat bounce from near-term bottoms and are likely to correct in line with other risk assets as equity markets tip into an intermediate correction. At the moment, all appears set for across the board test of risk asset prices versus the Dollar in an intermediate correction that begins second week of August. It is something fraught with interest and will set the base for the next market cycle.
I would exit all trading position across all asset classes and dive into the US Dollar for now. Avoid shorts until a top is confirmed in DAX followed by SPY. Incidentally, Nikkei may have already tipped into an intermediate correction unless it rallies to make a new top early next week; an unlikely event.
Dollar is king in an intermediate correction!
Yield on 10 Year Treasury Notes:
http://stockcharts.com/h-sc/ui?s=$TNX&p=D&b=5&g=0&id=p09297682487&a=309503520
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:
http://stockcharts.com/h-sc/ui?s=$GOLD&p=D&b=5&g=0&id=p34187299557&a=308778277
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:
http://stockcharts.com/h-sc/ui?s=SLV&p=D&b=5&g=0&id=p34187299557&a=309510990
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 $14 before finding meaningful support. Continue to be bearish in Silver with extreme prejudice :p
HG Copper:
http://stockcharts.com/h-sc/ui?s=$COPPER&p=D&b=5&g=0&id=p09297682487&a=308783851
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:
http://stockcharts.com/h-sc/ui?s=$WTIC&p=D&b=5&g=0&id=p09297682487&a=308784188
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 $111 price will sustain for long and WTI crude will also correct down with the US equity markets, possible from the end of second week of August. The next flare up in crude price should be used to exit longs.
US Dollar, DXY:
http://stockcharts.com/h-sc/ui?s=$USD&p=D&b=5&g=0&id=p45261830604&a=308786829
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:
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:
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.
USDINR:
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 $-INR by the end of 2013.
German DAX:
http://stockcharts.com/h-sc/ui?s=$DAX&p=D&b=5&g=0&id=p52333655007&a=308790722
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!
Nikkei 225:
http://stockcharts.com/h-sc/ui?s=$NIKK&p=D&b=5&g=0&id=p33738278881&a=308791043
I had expected the counter-trend rally in Nikkei from 12,435 to at least reach for the previous top of 15962. However, the rally topped out 14,589.91 on 19th July a key reversal day, whose importance I duly pooh-poohed last week! Such is life 😀
The revised wave-counts favor a drop in the Nikkei back to 1150 area in a an intermediate correction that could last till the end of 2013. Nikkei appears to have been the first major world equity index to go into an intermediate correction.
However, the longterm charts remain bullish and the rally from 700 levels on the Nikkei is far from over.
Shanghai Composite:
http://stockcharts.com/h-sc/ui?s=$SSEC&p=D&b=5&g=0&id=p63259530279&a=308791466
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:
http://stockcharts.com/h-sc/ui?s=$RUT&p=D&b=5&g=0&id=p34187299557&a=309495317
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.
NASDAQ QQQ:
http://stockcharts.com/h-sc/ui?s=QQQ&p=D&b=5&g=0&id=p34187299557&a=309494724
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:
http://stockcharts.com/h-sc/ui?s=SPY&p=D&b=5&g=0&id=p73268382013&a=309494440
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:
http://stockcharts.com/h-sc/ui?s=SQQQ&p=D&b=5&g=0&id=p51847297732&a=310290441
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.
NSE NIFTY:
http://stockcharts.com/h-sc/ui?s=$CNXN&p=D&b=5&g=0&id=p09297682487&a=308792266
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.
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: When The Market Offers You Money For Jam, Take Both and Run!
MARKET NOTES: When The Market Offers You Money For Jam, Take Both and Run!
This post should really be seen as a continuation of the last blogpost. The last one showed the longterm state of the markets in monthly charts and demonstrated how we were nearing an inflection point in the context of longterm trends. I would encourage you to go back and read it for perspective. This post deals with the same impending inflection point – the possible onset of an intermediate correction – from the perspective of the last leg of the rally up in terms of daily charts. The message from both in more or less the same.
Russell 2000, NASDAQ and S&P500, together with EU equity markets such as the DAX, show they are in the last part of this leg of the rally that started in November 2012, a point that marked the end of wave IV for most US markets on the way up from March, 2009. What that means is we will have a correction around Mid-August for sure. The only issue is if it will be like the ones we have seen many times on the the way up here or will it be of a much longer – and deeper – duration in terms of time and distance covered?
The maturity of the bull markets in terms of time, and the wave counts, favor the odds of a longer and deeper intermediate correction. Note that doesn’t mean a crash like the one we had in 2008. In fact the principle of alternation almost guarantees that the next correction will be beguilingly gentle to begin with. The sting and value destruction will be in the tail. What we are likely to see is a gradual deepening of the drops in prices followed by rallies that recover only part of the ground.
The price correction in most commodity markets is more or less over. That doesn’t mean they are now bullish. But many will tank with the correction in equity markets and that might be a good time to accumulate some of them for decent tradable intermediate counter-trend rallies. I have new take on WTI crude that might interest traders. It shows crude peaking out at $115 and then joining the rest of the herd into a correction.
DXY can correct down to 81.25 in the wave IV correction now underway. I reckon we are in the C leg of it. But maintain my longterm view of the dollar heading towards 85.50 or higher by the year end. That has implications for INR in Indian markets.
Time to take profits and move to the sidelines in an euphoria. The Russell 2000 mid-cap space is unbelievable. It has just returned 11% in the last 18 days over and above a similar leg just prior to the last correction. If that’s not euphoria, what is?
Yield on 10 Year Treasury Notes [$TNX]:
As expected, the yields on 10 year Treasury Notes [$TNX] drifted down during the week as panic in the bond markets subsided. They closed the week at 249.10 basis points. Note, this doesn’t alter the fact that the interest rate cycle as turned up decisively. Nor has all of Fed’s talk been able to reverse this fact.
Yields can be expected to drift down towards the 205 basis points mark as the market tests new support for the yields. The drift down simply accepts the new higher normal yields while working off the excesses of the panic.
If, as expected in this blog, the equity markets do begin an intermediate correction in mid-August, we could see a lot money returning to US Treasuries, further depressing yields. So the panic in bond markets is definitely done & over.
Gold:
Gold closed the week at $1292.90 after having made a bottom at $1223.70. I would not think we have found a longterm bottom in gold as yet. There may be further declines to come in the months ahead. But for now we have a temporary bottom at 1223.70 and gold appears to be rallying to establish some sort of an upper range within which to consolidate in the weeks ahead.
Gold could rally to 1350 or so till the middle of August in line with other risk assets. The metal could then correct to retest $1223.70 before attempting further counter-trend rallies.
Gold’s 50 DMA lies at $1350 and it could act as the first major overhead resistance. Not bullish on the metal despite the counter-trend rally underway. The metal could correct sharply as other risk assets fall in the ensuing across-the-board correction that I anticipate mid-August.
Silver:
Silver closed the week at $19.46 after having made a high of $20.25 since the bottom at $18.17. I remain very skeptical about the metal. My wave counts indicate that the metal could seek lower lows after mid-August. The metal has no notable price support before $14 on the downside. These aren’t levels to play the short side. But until Silver finds a confirmed bottom avoid trading in the metal; long or short.
HG Copper:
HG Copper went into a small counter-trend rally after finding a temporary bottom at 2.9835 on 25th June. The metal closed at 3.14, just under its 50 DMA, which is at 3.21. Copper’s counter-trend rally is unlikely to go beyond 3.21 for now.
Copper will correct with the rest of the markets. But there isn’t much downside to the metal below 3.0 and the metal could see a ferocious bear squeeze over the next few months if not weeks. Again, the metal is at the fag end of a very long correction and unless you are a compulsive trader, it is best avoided for its unpredictable volatility.
Not yet time to accumulate for the longterm.
WTI Crude:
WTI Crude’s counter-trend rally has been baffling to many in many ways. The best way to get your arms around the big technical picture is shown in the above chart.
Crude made a top at $107.43 in April 2011 and then corrected to $79.76 in June 2012. The rally from June 2012 now underway can take Crude to as high as $115. See together with rally in crude from the low of $40.24 in January 2009, you get a picture perfect 5 wave impulse rally that terminates mid-August around $115.
Must admit it took me a long long time to figure out this one. But it neatly accounts for the twists and turns in the crude prices that we have seen since 2009. If my analysis confirms a top of $115 in mid-August, we have fairly long correction in crude prices ahead of us.
US Dollar [DXY]:
The Dollar has been correcting from its recent top at 84.9250 made on 9th July. The correction, a 3-part A-B-C, Wave 4 could take DXY down to as much as 81.25. We are in the C part of the wave. The Dollar is likely to resume its uptrend on a successful test of 81.25.
The low on DXY corresponds to the expected high on the equity markets around mid-August. Coincidence? If so, very convenient :p
Maintain my longterm bullish view on the DXY with at target of 85.50 before the end of this year.
EURUSD:
EURUSD has completed its complex correction from the top of 1.37 with the close at 1.2780 on 9th July. With that the currency pair resumes its counter-trend rally underway from the low of 1.2050 formed in August 2012.
EURUSD closed the week at 1.3142, well above both its 200 and 50 DMAs both of which are fairly close together 1.31 though they haven’t generated a longterm buy signal as yet.
EURUSD’s first major overhead resistance lies at 1.34 while the 200 DMA will be its first support for sometime. Mind this is a counter-trend rally and so subject to a very high degree of jaggedness and volatility.
USDJPY:
USDJPY has been in a counter-trend rally from the low of 94 made on 14th June. The rally appears to have topped out 101.17. The pair is now into wave C of the correction from the recent top of 103.65 with a target of 94.
That said, has the counter-trend rally ended at 101.56 as the chart shows? Not quite. There is room on the charts for the counter-trend rally to extend all the way to 103.50. On the other hand, as a read of DXY indicates, the extension is possible but improbable.
The EURUSD may be the better way to play DXY for the immediate future till USD has definitely topped out in the Yen market.
USDINR:
The Dollar appears to be consolidating just above the INR 59 mark on the charts. This consolidation is likely to continue well into September before the Dollar makes any major move either way.
The Dollar’s first support in the consolidation lies at INR 57.30 followed by another major support at INR 56. As DXY heads lower to 81.25 from its current level at 82.71 over the next few weeks, expect it move lower in the INR market to test both these support levels.
The panic in the INR market should now be over. Note the fall in DXY is not yet fully into the USDINR price at the moment because of the panic buying.
That said, maintain my bullish view on DXY and USDINR. We may end the year with USDINR closer to INR 63.50 levels rather than INR 56.
NIKKEI 225:
Nikkei 225 closed the week with a key reversal day at 14,589.91. The index is in a counter-trend rally from the low of 12,435.95 with a target of 16000 or thereabouts. Nikkei has many a key reversal day and the rally just continues as if nothing has happened. So it is no more than a cautionary flag at this point.
My sense is that Nikkei will at least make a higher top than the one at 15,962.89 in this counter-trend rally. The wave counts for Nikkei that I favor show the rally from the low of 6840 in October 2009 as the Wave I of a new bull market, which though poorly structured, hasn’t yet quite finished its job and has much distance and time to go. The leg down from 15,962 was “A” part of the correction and we are in “B” up. It is usual for B waves in Wave I to exceed the leg down in distance. For Nikkei to confirm that pattern would be a very powerful bullish signal. Maintain my bullish stance on Nikkei for a new top. The correction from there will likely coincide with the mid-August D-day.
Shanghai Comp:
Shanghai made a recent low of 1851 and rallied smartly from there to make a high of 2093, just under it 50 and 200 DMAs. The index closed the week at 1992.65 and is in the process of correcting for the last rally.
My sense is SSEC could drift down to 1900 early next week and that would be a good buying opportunity if it comes by. That said, Shanghai is likely to turn up from 1900 or perhaps even earlier to rally for at least its 200 DMA which is currently in the 2200 region.
The peak is indicated at the middle of August. The index could well correct from there along with rest of the world markets.
German DAX:
There are only two issues in all the charts that follow. Firstly, will there be a new high? And secondly, will the new high be high enough so that the correction that follows won’t tip the index into an intermediate correction.
First there is space for a new high. There is nothing on the charts, not even over-bought conditions, to show that there won’t be one. Will it be high enough? My sense is DAX would have to overshoot its indicated target by a good 5 to 8% for it to avoid a follow-on intermediate correction. The wave-counts say it is good place to trigger an intermediate correction. The rest really depends on the exact technical state of the market.
The correction that follows will be deceptive and back-ended, & not a crash.
Russell 2000 [RUT]:
RUT is arguably the most aggressively bullish index in the US and that by itself should be a cause for concern! It is the buying frenzy in mid-cap stocks by retail investors that sets up markets for deep corrections. Plenty of evidence that a buy frenzy is actually underway.
RUT closed the week at 1050.48. From the last low of 943.41, Russell is already up by 107.07 points or 11.3% in a little over 18 days. This is on the top of another similar parabolic run from 898 to 1010 about a month back. How much can the herd digest?
RUT has already made a new high. There is room for some more euphoric rise. It would be foolhardy not to take profits and run. Such euphoric conditions signify serious longterm distribution to the gullible & greedy.
Nasdaq 100 or $QQQ:
Instead of the NASDAQ 100, I have used its equivalent $QQQ ETF that has the advantage of an explicit volume to go with the price and is often more revealing than the Index itself.
$QQQ has rallied sharply from its low of 68.99 to a high of 75.50 before closing the week at 74.59 following appalling results from MSFT and GOOG. The index has major support just atop the gap at 74 that it had better not fill. In fact, that might be a good way to trigger your stop losses and exit the market.
The index is likely to test its support at 74 before continuing into the rally. As I indicated last week, the rally has run out of telomeres. You could have an extension if Index pulls a spectacular 5 to 8% rally from current levels. But the probability is dim & the odds are that the next correction will gently tip the markets into an intermediate term correction spanning many months.
S&P 500 using SPY:
SPY is just a traded ETF version of the SPX. The advantage of using it instead of the Index is a good handle on volume versus price equation.
SPY has already made a new high. The question now is about the correction to follow. Will it be a modest one shot affair spanning a few weeks or a month or two to be followed by a resumption of the bull market or will it be one spanning a year or more?
SPY is barely 1.50 points higher than the top of the previous rally that triggered a correction. Namely it has made a high of 75.50 against the previous top of 74. That is not much. What the numbers signify is diminishing strength in momentum. SPY has scope to go higher. But it would be wise to take profits.
Volumes in both QQQ and SPY have been higher on days the market declined. There are divergences on the RSI charts as well. All said, odds favor the onset of a fairly prolonged correction at the end of this leg of the rally. D-Day could be any day after 14th August though my charts suggest 19th for SPY.
NSE NIFTY:
NIFTY closed the week at 6029.20 after rallying from its recent low of 5590, also its 200 DMA. The rally towards the previous top of 6250 is reactive in nature. Emerging markets have been correcting savagely for some months now and may not take a severe hit as the world markets tip into an intermediate correction. But it would be unwise to rule out turbulence.
My sense is NIFTY will almost certainly hit a higher high than 6250 in this rally. It is the correction that follows which will be crucial. I would take profits at the projected high and then see how the correction that follows shapes up.
It is hard to see a meaningful & sustainable rally in the NIFTY before a new government steps in. And as the longterm charts in the previous blogpost show, there is room for a downturn in NIFTY that takes to test 5400 or even lower by the end of 2013.
Wise to take profits.
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: As the markets hit new highs, look to take profits.
MARKET NOTES: As the markets hit new highs, look to take profits.
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.
This blog had ventured to suggest that the last correction may not be the beginning of a intermediate correction and that we will have a subsequent shy at new tops. That scenario appears to be working out. Nasdaq 100 has already made a new high, SPX is pretty close to one, and others such as Nikkei, Shanghai and NIFTY are not far behind. But this blog had also suggested this rally may be the last before a substantial correction. Maintain that view unless the new highs are 5 to 6% higher than previous tops. So keep exit plans handy. D day could be 2nd week of August.
There is a rather lengthy note on the $-INR in the blog. Have always argued our whole foreign trade and foreign exchange management is riddled with flawed assumptions, not so much for lack of knowledge and understanding, but rather to protect vested interests. Cotton exports against lower cotton prices for local manufacturers is the sort of problem at one end of the spectrum. The failure to see value-addition as the key variable of domestic prosperity rather than the absolute export numbers is the other. Take cotton. What are we exporting? Sunshine, water, labor and some fertilizer & pesticide. What do spinners add to cotton by spinning it into yarn? Barely 10% at enormous cost. But if you take the distribution of profits between growers and spinners, the lion’s share goes to spinners. Such is the perversity of our economy. Forex has been the key fulcrum on which the edifice to transfer wealth from farmers to industry was built under the socialist raj. The apparatus is still largely intact. Most economist know of it. Nobody talks of it.
No change in the prognosis on NIFTY. Use the counter trend rally to exit.
Happy trading.
Yield on 10 year Treasury Notes:
http://stockcharts.com/h-sc/ui?s=$TNX&p=W&b=5&g=0&id=p16570754730&a=308769391
The yield on 10 year treasury notes continued at elevated levels but moderated a bit, closing the week at 259 basis points after having made a high of 274. On the long term weekly charts, 280 basis points appears to be a good place to pause from some consolidation before the uptrend resumes. The climb in yields has been pretty steep
since May. We could have a few weeks of consolidation with yields dropping back to around 200 bps as the correction sets in.
Gold:
http://stockcharts.com/h-sc/ui?s=$GOLD&p=M&b=5&g=0&id=p91093061335&a=308778277
Gold continues to surprise to the downside. It closed the week at $1277.60 after rallying from a new low of 1212.10. The monthly chart of gold prices above shows that while $1160 was a support area, Gold is more likely to test the $950 area before it finds some solid support from long term, long only investors. The wave counts, the support line for the long term uptrend support line and the fractal being traced out by gold prices all point to further weakness in gold prices. There is plenty of time for gold prices to drift down as well. Indians would be wise to leave the metal alone for some time but then I have been warning of a bear market in gold for the past 2 years and more. Don’t see a significant rally in gold prices until after March 2014.
Silver:
http://stockcharts.com/h-sc/ui?s=$SILVER&p=M&b=5&g=0&id=p94549700653&a=308782266
Silver’s first major support zone was $20 made a low of $18.17 before staging a minor rally to $20.25, closing the week at $19.792. The above monthly charts shows the next major support for Silver is at $14 and it has plenty of time to get there. I don’t think the metal will find any significant rallies from here until it test $14 although it can hang around current levels for a while.
HG Copper:
http://stockcharts.com/h-sc/ui?s=$COPPER&p=M&b=5&g=0&id=p58042402073&a=308783851
Copper has been rather reluctant to test levels below 3.0 and has bounced from the region on several occasions in the past. My sense is that while Copper has more or less finished its price correction, it could mark time in the 2.80 to 3.40 price region before staging a significant rally. Definitely not a metal to short at these prices.
WTI Crude:
http://stockcharts.com/h-sc/ui?s=$WTIC&p=M&b=5&g=0&id=p58042402073&a=308784188
WTI Crude’s price has been trending up on thinner and thinner volumes for the past 2 years! That fact alone should make one very wary of WTI Crude’s chart. The second fact that put’s crude long term chart out of kilter is the fact that it peaked in 2007, long before the rest of the commodities did so. In my view that is significant price “failure” in on the long term charts and crude’s rather anomalous price behavior points to the same fault line. There is no doubt in mind that the technicals point to a price of WTI crude in the $80 region in the intermediate term ahead.
That said crude has been in a counter-trend rally from a price of $84 since the June of 2012 and that bear rally could have peaked out $107.426. My sense is that elevated crude prices reflect some sort of a technical bear squeeze that cannot persist for long. However, keep in mind crude’s tendency to shoot for the highs at the slightest provocation. My sense is crude will return to test $80 levels before long. But avoid shorts.
Reuters CRB Index:
http://stockcharts.com/h-sc/ui?s=$CRB&p=M&b=5&g=0&id=p58042402073&a=308785978
The CRB Index puts the triangulation underway in commodities into global perspective. The index itself has little predictive value but it does confirm the notion that triangulation in the open auction markets is perhaps the only way to true price discovery. Note the 250 support line for the index. With the index poised at 270, we are not far from support. My sense is agricultural commodities will recover way ahead of the industrials & precious metals. But that’s a subject for another day. Long term bears will be looking to exit shorts in most commodities.
US Dollar Index [DXY]:
http://stockcharts.com/h-sc/ui?s=$USD&p=M&b=5&g=0&id=p58042402073&a=308786829
This week’s blog is all about underlying long term trends since markets appear to be approaching an inflection point. Who looks at monthly currency charts in markets? Well I do and its very instructive to place things in perspective. First note that DXY bottomed in 2008 and then confirmed that bottom in 2011. Its been in an uptrend since then and those surprised by my bullishness on the $ for the past 2 years contrary to all conventional wisdom now know why. That uptrend is about to end. If it ends now, or after another 6 months is the moot question.
Note DXY has broken out of a fairly large and significant triangle and has since confirmed the breakout to the upside. That’s the basic reason why I have been suggesting a target of 85.50 for the DXY. The index can overshoot that target to test 89 before an intermediate correction sets in. So 2 things stand out. Firstly, the long bull run in the DXY is now approaching its final run up. So things will be volatile. And secondly, wave Vs can be terrible in what the do to price extension. We are in wave 3 of Wave V from the bottom of 72.50 in 2011 by my count. Fasten seat belts.
EURUSD:
EURUSD staged a smart counter-trend rally from the 1.27 price region to 1.32 before closing the week at 1.3066 sandwiched between its 200 and 50 DMAs. The rally from 1.27 upwards was reactive and the correction underway from 1.37 in February is far from over.
My sense is EURUSD will return to test 1.27 over the next 4 weeks before turning up. I don’t think we will see EURUSD below 1.27 in this correction.
USDJPY:
USDJPY closed the week at 99.21, a shade below its 50 DMA at 99.50. Recall USDJPY bounced back from 94 after falling from a significant new top at 103.60. While the bounce from 94 is corrective in nature, and therefore we will see sharp corrections on the way up, my sense is that the corrective way is exhibiting sufficient strength to show higher top than 103.60; something one wouldn’t expect in a cup-and-and-handle correction from 103.60.
Not bearish on the Dollar against the Yen. And that is sort of confirmed by the technical position in both DXY and the EURUSD.
USDINR:
My data vendor & charting service let DXY, EURUSD, USDJPY and USDINR in particular fall between their two stools. One doesn’t have the data and the other the charts! So excuse the charts and follow the narrative carefully using whatever charts you have to track prices. For I am going to show you why I think USDINR will be close to 70 by the end of this year.
Recall, the journey of 20% devaluation of the INR every decade or so began with reforms in 1990. It is RBI’s biggest folly that it devalues the INR in sudden bursts of 20% in a matter of weeks and then lets the INR appreciate in the interim. While that is politically convenient for RBI and Govt., because the bad news can be fobbed off as a one time crisis due to “external factors” as is being done now, it is an absolutely ruinous practice as far as exporters are concerned. Why? In the normal course exporters face an appreciating INR under the current scenario and that takes away 2 to 3% of their sales assuming a collection period of 3 to 6 months. While in an depreciating INR scenario, because it is usually a sudden haircut that disrupts normal markets very few exporters can actually lock-in the benefit of a depreciating INR.
That incidentally is one of the least perverse practices of RBI’s exchange rate management. Unfortunately, RBI treats Forex management as a black art and the few bankers that actually have expertise in the area are more interested in complicating rather than simplifying things to earn fat fees and spreads. The truth is, China style, constantly but slowly [not more than 3% pa.] depreciating INR pegged to the $ would best serve India’s interests. And it would eliminate all the unnecessary volatility in exchange management & reduce bankers’ fat spreads across the board. But who is to tell RBI? Our pink paper editors can’t be bothered to note the difference between direct & indirect quotes in the FX markets mangling the English language daily. So bear with me as I demystify what’s going on.
Back to basics. The first mega-wave of the up move of the $ began in 1990/91 when the $ went from INR 10 in 1991 to INR 49 in 2002. That was a 5 part bull move of the $. I have part of the chart in my database but can’t show it here. From the 49 in 2002 point began the correction to the up-move from INR 10. This is where the full folly of RBI become so obvious and has proved so ruinous to our software & services industry, particularly low value added call centers, transcription services and the like. From INR 49, RBI allowed the $ to depreciate against the Rupee to INR 39 in 2007. Which is to say, over the 5 year period, 2002 to 2007, every marginal player in the software & services industry was wiped out by competition from Brazil & Philippines. Export data from both countries bears out that India’s loss was their gain. Remember low-value-added services work on paper thin margins, and nothing but rents and telephony as expenses apart from labor. With little value added except labour even a 3% constant erosion of their profit margin annually wipes out their viability.
On the other hand, these businesses create a huge middle class of workers who essentially earn Dollar salaries. It is their consumption that drives the demand for everything from small cars & washing machines to housing. When those jobs go abroad, their demand tanks & so does our GDP. What’s so complicated about this? RBI should be well aware of all this. If it still allows a small number of foreign banks to structure the forex market to India’s disadvantage, knowingly or unknowingly, it has only itself to blame.
And so there was the giant B wave correction from 49 to 44, the A of which did a 5 part impulse wave to 39 in 2008, followed by a corrective B to 52 in 2009 and from the the terminating C down to 44 again in 2011. Was all this volatility necessary? Absolutely not. It only enriched foreign bankers and wiped out our exporters & new jobs created by them. I kid you not.
From the level of INR 44 July 2011, the Dollar began the III wave up and we are in the middle of the first of its sub-waves up and the $-INR is already 60. The chart above begins to track the moves at the $-INR level 44 in July 2011.
The first A wave took the Dollar from 44 in July 2011 to 57.3 in June 2012. From there, the Dollar has had an orderly correction down to INR 53.5 which ended January 2013. That puts the current wave up as “C” which could extent to give the full 5 part impulse wave later on. For the moment we will assume just a 3 part A-B-C wave up.
What do you have? As the chart shows, the “a” part of the C wave [which itself breaks down to the usual 5 part impulse wave up] took the Dollar up from 53.50 to INR 61. We are now correcting for that up-move and the Dollar could retest 56 from the topside in the next 2 to 3 months. As night follows day, there will be the “c” wave up from INR 56 after the correction some time towards November 2013 or January 2014. Where will “c” wave take the Dollar? Connect the tops from July 2011 parallel to the rally’s support line and you get a target for the Dollar of 71. Safe to say the technicals point to the Dollar ending 2013 at about INR 70.
Note, we have assumed a mere 3 part A-B-C up from 44 in July, 2011. That can extend to a 5 part impulse wave whose target would be much higher. Anybody wants to bet on the $-INR just before the election results? Yep you got that right. If C wave extends, the 5 part impulse would take us to elections 2014. Gawd help us all.
Trust me RBI needs some very sharp lessons in letting foreign banks run the forex markets to India’s detriment. One way for it to demystify things is to realize that all that that the foreign bank really does it to borrow Dollars in Singapore and sell the same in Mumbai. The rate it sells them in Mumbai includes its funding cost plus commission. And a small premium because for every 100 $ sold it will get back only $85 from the market given our trade & investment deficit. The balance 15 has to come from RBI’s reserves. To postpone that 15% immediate outflow, RBI virtually hands over a monopoly to foreign banks since Indian banks face a stiff funding cost in Singapore. For pennies we hand over something of huge strategic importance to firangi bankers. No wonder the make such fools of us.
So, a correction of the Dollar back to 56 and then the final swing up to 71 by year end. It is not magic, just logic of the markets.
DAX:
http://stockcharts.com/h-sc/ui?s=$DAX&p=W&b=5&g=0&id=p73783627979&a=308790722
DAX closed the week at 8212.77 a whisker above its 50 DMA at 8173. So far DAX is behaving as expected in this blog. Wave counts favor a retest of the recent top at 8550. In fact we could have a higher high. But unless the higher high is at least 5 to 6% higher than 8550, the subsequent correction that follows in Mid-August could tip the index into an intermediate correction. Look to exist. Sometimes the risk is simply not worth the potential return.
Nikkei 225:
http://stockcharts.com/h-sc/ui?s=$NIKK&p=M&b=5&g=0&id=p58042402073&a=308791043
The above monthly chart clearly lays out the neat arrangements made for a new high by the managers of Nikkei 225 even as it corrects from the recent top of 15962. In the initial phases of a bull move, dip buying by left out bulls often lends a momentum to markets greater than the initial impulse. In the normal course one would expect a cup & handle correction to the rally from 8180 to 16000 which is basically Wave I of a new bull super cycle for Nikkei. However by going into a correction slightly earlier than expected & from the down-sloping bearish trend-line a trap has been laid for bears. If enough get trapped, their covering alone will ensure a new high. Note the candle to 16000 without a body but a huge spike. Price without buying which points to the bulls’ intention to return after the bears have been trapped. So avoid shorts on the Nikkei. In any case it is in a correction with little downside until the B up currently underway exhausts itself. Note the time element. A new high would sync with SPX also due for a new high mid-August. Hint, hint.
Shanghai Composite:
http://stockcharts.com/h-sc/ui?s=$SSEC&p=M&b=5&g=0&id=p74484342309&a=308791466
As mentioned in my previous posts, Shanghai has completed the second leg of its correction from the top of 6060 and has now caught a counter-trend rally up that could eventually test 2450. It is not yet the beginning of a new bull move although it might look like it. China has a lot of time correction to go through although the price correction is now over. All the same it is nice tradable rally and the downturn can easily coincide with world markets come mid-August. So don’t be late to the party & get caught.
Nasdaq 100:
http://stockcharts.com/h-sc/ui?s=$NDX&p=M&b=5&g=0&id=p58042402073&a=308792049
You get such long duration rallies as in the Nasdaq 100 only from an absolute nadir which is what the low of 2009 was for the index combining the low of both the correction for the bubble and the crash of 2008. In any case, the warning is clear enough. We are well into a mature rally that is ripe for correction.
I wrote in this blog during the last fall that we will have another last leg up and most probably a new high. Nasdaq 100 closed the week at 3079.07 giving the promised new high. There is still 2 or 3 weeks for this rally to run. Regardless, I would be looking to exit positions. You got your new high against all odds. Take your money & run.
SPX:
http://stockcharts.com/h-sc/ui?s=$SPX&p=M&b=5&g=0&id=p58042402073&a=308792081
SPX closed the week at 1680.19 just short of the previous top of 1687. With that, SPX kept its promise of wave counts that showed there would be another rally after the last fall with the possibility of a new high. I repeat what I have been saying for Nasdaq. In terms of wave counts, we have run out of telomeres. To get an extension you would need a new high 5 to 6% higher than the previous top such that the next correction down doesn’t go lower than 1560. That’s a tall order so late into a mature rally. So the prudent would take their money and run. Don’t play the short game though. Not yet. Best to wait for confirmation of an intermediate down-trend.
NSE NIFTY:
http://stockcharts.com/h-sc/ui?s=$CNXN&p=M&b=5&g=0&id=p58042402073&a=308792266
By one count, shown above, but not the one I favor, [both show a similar prognosis but this one is easier to explain] suggests NIFTY is approaching the end of its correction from the 2008 top. Curiously, the market might hit the bottom just as the election results for 2014 come due. Coincidence? No the trick’s been accomplished by an extension to the bearish wave count but I will explain that in another blog-post. Meanwhile the old prognosis stands. NIFTY is headed up into a counter-trend rally that can see it make a new high in the region of 6300.
What follows will be the terminating C for many old economy stocks like steel and financial scrips like PSU banks that will cause some mind-boggling damage to valuations. PSU banks in particular, which are some 15 to 20% of the market, look likely to be hit the hardest.
Look to exit and reenter later after the carnage. Besides, it is election time. Regardless of who you favor markets will tank well before them. Then there is the INR to contend with.
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 Equities resume uptrend amidst a surging Dollar and crashing commodities.
MARKET NOTES: US Equities resume uptrend amidst a surging Dollar and crashing commodities.
The interest rate cycle continued its ponderous upturn. The churn is far from over and yields on 10 year US Notes flared up to 274 basis points. We may be headed into yields as high as 300 bps pretty soon. The fixed income markets continue to be in a flux while equity markets now appear to take rising yields as an affirmation of future growth of GDP. Commodity markets continue to tank with rising yields.
A resurgent US Dollar is the key feature of the current scenario and its value continues to drive other markets from Euro, Yen to the INR. Most currencies continue to seek lower valuations against the green buck. This trend is likely to continue until the Dollar peaks out by year end around 89 as opposed to 84.5 right now.
A rising Dollar and higher interest rates are roiling commodity markets. A brief look at the CRB Index shows we may not have seen a bottom in the commodity markets as yet despite the long downtrend underway for the last two or more years. There is scope for further price and time correction in most of them including Crude.
Wave counts suggest we may be in the middle of the last rally up in the US markets before an intermediate correction sets in. For that view to be negated we will need new tops in this rally that are 5% or more higher than previous tops. Considering the mature bull markets we are in that may be unlikely. Hence those playing longs should keep tight stop losses and look to exit.
Shanghai presents a good buying opportunity never mind the horrendous news flow from there.
Back home, the $-INR dominates news flow. For the immediate term the worst may be over in terms of Rupee depreciation but year end values are likely to be nearer 65 than 60. Expect Indian equities to rally to 6300 and then correct along with the rest of the world equity markets.
CRB Index [Commodities]:
The Reuters/Jefferies CRB Index closed the week at 280.72. The above monthly bar chart shows commodities could correct a lot more from current levels before we get to a bottom. The chart is presented here just to give a perspective to the ongoing correction in commodities. Not all commodities in the Index will correct at the same time. But clearly, it is too early to call a bottom in commodities as some have been suggesting.
Gold:
Gold closed the week at $1212.70 after making a high of 1261.70 during the week. Gold could head back to retest 1160 before rallying a bit towards the 1320 overhead resistance on the charts.
Clearly, the long term bearish trend in Gold is not over and we could see multiple attempts to take out the 1160 support going forward. We may not see a robust counter-trend rally in gold until early next year.
Silver:
Silver closed the week at $18.81. What is noteworthy is that Silver made a new low of $18.19 and rallied up to retest the $20 as the new overhead resistance and then fell from there to close at 18.61. Expect Silver to take out the $18 mark next week. As noted earlier there isn’t any appreciable support for Silver below $20 all the way to $14. A gold like collapse in Silver prices appears likely on the charts.
HG Copper:
Copper closed the week at 3.065 after having rallied up to 3.1745 from its recent low of 3.0725. There is nothing on the charts to suggest that the downtrend in Copper is over. The metal appears headed to retest its longterm uptrend support in the region of 2.50. A breach of the crucial support at 3.0 would confirm this prognosis. On the other hand, a short counter-trend rally to 3.40 can’t be ruled out altogether. The odds favor a breach of support at 3.0.
WTI Crude:
WTI crude closed the week $103.22. First overhead resistance from current levels lies at $106.50. It is highly unlikely that crude will take out this resistance in the current rally. On the contrary, crude is more likely to cool off and head down to retest support at $98.50. Crude is over-bought. It has never strayed this far out from its 200 DMA in recent years. First support below $98 lies at $96.
Yield on 10 Year USTs:
The bond markets were back in turmoil after a short respite. The yield on 10 year Notes flared up to 274 basis points roiling commodities & bonds. The weekly chart of yields above indicates that the markets want to test the yields right up to 285 basis points which is the first major overhead resistance. Markets do overshoot and a yield as high as 300 bps may be on the cards in the next few weeks. The almost 1 way rally in yields from 160 bps to 300 bps signals a tectonic shift in the interest rate cycle whose full effect is yet to ripple through all asset classes. There is no guarantee that yields will peak out at 300 bps for now.
US Dollar [DXY]:
DXY is clearly over-bought and at a significant overhead resistance having closed the week at 84.6890. DXY has another major resistance at 85 and may pause there to consolidate a bit. However the uptrend is unlikely to halt there. DXY is in the initial stages of a Wave V up whose target could be in the 89 region.
EURUSD:
With Dollar in such a strong uptrend that other currencies are tanking and the Euro is no exception. EURUSD closed the week at 1.2830 slicking through the rally’s trend line support at 1.30. With this the Euro has clearly signaled its intention of testing 1.27 support. In fact EURUSD could head to as low as 1.24 after a brief counter-trend rally from 1.27 early next week.
USDJPY:
The USDJPY chart is a mirror image of the DXY chart. As mentioned last week the Dollar is headed to 103/104 Yen and is likely to trace out a cup-and-handle from the previous top at 103. The absence of any meaningful correction to the rally from 94 indicates much turbulence head for the USDJPY pair as it gets caught between a resurgent Dollar & Abenomics. I would not be surprised if the 103/104 Yen level is breached.
USDINR:
INR has many a reason to seek lower levels against the Dollar. India allows investment inflows to mask the true INR value as determined by trade flows which is rank bad practice over the long term. RBI needs to seriously rethink the myths its has been perpetuating. Worth reminding RBI that [a] in terms of “value added in India” our software & services exports of $50 billion a year as the equivalent of about a Trillion Dollars worth of merchant exports from China. This value created in India & paid for in Dollars is what drives growth in domestic consumption. Playing with these exports is more ruinous for India than anything else and [b] Philippines has the fastest growing GDP and services exports in the world thanks to RBI’s wrong headed exchange rate policies in the past. You just cannot allow the competitiveness of services exports to deteriorate without tanking the domestic economy. Furthermore, RBI must look to the weakest link in the export chain to determine INR value and not listen to industry leaders like TCS/INFY. The majors have a vested interest in eliminating domestic competition from small exporters and at the margin it is the weakest player that must remain competitive for India’s exports to grow. RBI has been talking INR rates to the wrong people!
That said, INR is clearly following trends in the value of Dollar abroad. After a brief correction, the USDINR pair closed the week at 60.215. In terms of wave counts and time, the pair has much more scope to the upside. My sense is that the pair will follow the DXY as the latter trends higher. Maintain my estimate of 63.50 to 65 INR per Dollar by end of this year.
DAX:
DAX closed the week at 7806 after having retested its 200 DMA at 7700 during the week. With this, my sense is that the correction in the index from the top of 8557.86 has been completed and the index is likely to resume its uptrend back to the previous top early next week. Too early to say if we will see a new top. But a retest of 8560 is very much on the cards.
NIKKEI 225:
NIKKEI closed the week at 14309.97. First resistance from the current level lies at 16000 and the index appears headed there. Barring minor corrections on the way, there is nothing on the charts to stop NIKKEI from getting there.
Shanghai:
Having emphatically clarified that 1920 is not a true bottom, Shanghai has been in a counter-trend rally and closed the week at 2007.20. Shanghai appears headed towards 2240 region which is its 200 DMA. Shanghai’s counter-trend rally now underway could see it test 2450 before long. While the index hasn’t bottomed out, the counter-trend rallies are likely to be as strong as the corrections that follow. Avoid shorts, play long.
Russell 2000 [RUT]:
RUT closed the week at 1005.39 just a bit short of its previous top of 1010. That the mid-cap space in the US is much stronger and in such fine fettle speaks for the direction in which equities are likely to head from hereon. Note SPX and DJIA present a comparatively weaker structure at this point which could be a bear trap.
NASDAQ 100:
NASDAQ 100 closed the week at 2963.22, just atop its 50 DMA. First overhead resistance lies at 3000 followed by the previous top at 3050. While not as strong as RUT, the technical picture for NASDAQ 100 is much stronger than SPX or DJIA. Will we have a new high? Possible but unless we have a substantially higher new high its utility is moot.
SPX:
SPX closed the week at 1631.89, just atop its 50 DMA at 1625. First resistance lies at 1655 followed by the previous top at 1687. A retest of the previous top at 1687 is almost certain. A new high can’t be ruled out. However, unless we get a substantially higher high [5% or more] the current rally may be the last of them for a while. Time for extreme caution in this rally. Keep tight stop losses.
NSE NIFTY:
NIFTY closed the week at 5867.90 after having tested support at 5750 during the week. The close was above the 200 DMA but below the 50 DMA which lies at 5925. NIFTY is headed in a counter-trend rally to the previous top of 6250 and there is no logical reason not to expect a new top. However, this is a counter-trend rally and even if we get a new top, it is unlikely to sustain for long. NIFTY’s rally to 6300 is tradable but keep in mind the reversal likely from 6300 along with the rest of the world’s equity markets.
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.
sonaliranade 