Home > Uncategorized > Market Notes: 7th Jan 2012: Bullish Divergences on the Shanghai Composite Index

Market Notes: 7th Jan 2012: Bullish Divergences on the Shanghai Composite Index

Market Notes: 7th Jan 2012:  Bullish Divergences on the Shanghai Composite Index



Shanghai Composite:  I have long held the view that the Chinese market is in an orderly long-term correction since October 2007 and that the Index should bottom out in January this year.  At the level of 2150, further downside to the Index is limited.


There two very early tentative signals, that at around 2130, the Index has bottomed out for now.  Firstly there is a double bottom at 2133.75 on the charts.  Not so significant by itself, this should be read with a series of rising bottoms on the 14-day price ROC since the 15TH December even as the Index continued to fall.  That’s a clear cut bullish divergence.


This is at best a preliminary flag.  A cross above 2300 over the next few trading session will validate the signal. On the other hand, a fall below 2120 will probably invalidate the signal.  Either way, maintain my view that downside on the Chinese market is limited from these levels.


$-Index:  The index performed exactly as expected nicking the 81 mark and currently stands at 81.7.  It is a strong resistance area that attracts selling.  A significant break away from the area is not likely without further consolidation.  On the other hand, the $ could linger in this area till the end of the month.  Whichever way it spends time here, the $ should turn down from 81/82 level by the 1st week of February.  The $ rally is now mature in price terms but may have a week or two more to run in terms of time.  Not bullish on the $ unless it decisively breaks past 82.5.


Gold:  Gold showed bit a pulse in nicking the $1620 level as the Euro tanked and rumors of panic buying in some EU countries circulated through the market.  The nick is not significant in as much as a rally to $1620 was expected anyway. Euro shakiness as it tests 1.25 level in the next two weeks may let the gold linger here for a while.  However, nothing on the charts suggests anything but a test of $1400.  In terms of time Gold has a long distance to traverse before it is out of the woods.  First downside target for gold is $1550 followed by $1400.  A spike to $1650 would not invalidate this view.


Euro-$:  As expected, Euro plunged towards 1.26 levels, and currently stands at 1.27200, not far from it first target of 1.26 that could be achieved next week.  Is the plunge vicious enough to take it to 1.20 levels, the second target? In terms of time and structure, I would rate the probability of a fall much below 1.26 as very low.  A Euro rally could on the cards unless the Euro cracks 1.26 with a huge momentum.  The strength of the ensuing Euro rally could surprise. I normally don’t discuss fundamentals here, but since this prognosis is goanna raise many eyebrows, my suggestion is to consider the scenario where FeD steps in to buy say Italian or Spanish bonds directly.  Note there is no legal bar to this and the Geopolitical impact of such a move would be staggering.  So watch out!


NYMEX Crude:  Crude is currently at $101.56 per barrel.  It did not break its minor overhead resistance at $105. Typically you would expect this to happen in 3 or 4 attempts and this was third in the current series beginning in November 2011.  Crude may come back to confirm its current base being built at $100 before taking a shot at 105 and then 115.  Crude may not flare up unless something untoward happens in Iran but it isn’t bearish.  Stay long.


HG Copper:  Copper is currently positioned at 3.42650.  Having made a minor double bottom at 3.26 it is currently headed towards its first resistance at 3.6.  Copper needs to break beyond 3.7 for a meaningful rally.  Not bearish on Copper but would only above 3.7 if the Chinese markets turn up as expected.


Sensex:  The Indian index on the charts is an unmitigated disaster.  The index should turn down and retest closing low of 15,100 before any further significant move.  A break below 15,100 opens the way to 14,750 followed by 12,600.  The Sensex is likely to hug the bottom of the down channel for the next few weeks.  A crossover below 15,000 appears on the cards.


Geopolitics:  Markets discount geopolitical trends into prices, sometime with fair accuracy, some times not.  At other times they are caught completely unawares.  But there should little doubt that the information trickles into the market and many players act on it and their actions are reflected in the prices.  This trend will only gain further momentum as Wall Street rivals the CIA in hiring ex-CIA analysts now.


How about the inverse?  Can the markets be used to validate or invalidate a geopolitical outcome?  In theory, the outcome is embedded in market price if informed players have acted on the outcome.  Are there enough such trades in terms of volume that would make such an analysis possible?  Here are two very important geopolitical issues:


1. Will Germany have its way with austerity that it seeks to impose on PIGS or will it concede?


2. Will Iran be sanctioned aggressively or will there be a war in Iran?


Following is what the markets say on these questions in terms of price signals.  Germany will concede and there will be no war but Iran will hurt terribly.  In Iran regime change is more likely than war. Purely as some food for thought I offer the following scenario for consideration.


Here is what we have in the current market prices:


  1. Despite a scaling down of the world economic growth from 2.5% in 2012 to about 1% or less, crude shows no sign of going back to sub $80 levels.  This is despite a substantial step up in domestic gas production in US & Canada that has reduced demand for Middle Eastern crude.  China will take up a part of the slack as will India.  But the markets are showing a step up in crude prices to $120 when they should be falling back to $80.  Is trouble brewing in the Middle East that may send prices rocketing?  What else could account for the “anomaly” in crude prices?
  2. The Euro is at 1.27 headed towards a test of 1.26 level.  It is now almost certain that if German austerity is pursued to its logical conclusion, when PIGS are experiencing a GDP contraction of 10 to 15%, a severe deflation in EU will happen.  Therefore, either if Germany does not relent, or is not compelled to relent; the Euro will collapse tripping the world economy itself into a recession.  That is to say, the Euro at this point should be kaput.  In the markets the Euro may be tanking but, despite the deluge of bad news and near certainty of deflation if it does, the Euro is testing 1.26.  At the very least it should be below 1.20 by now.  So where is Euro’s strength coming from?
  3. Gold has been sold to investors ad nauseum as a hedge against hyperinflation and currency collapse over the last four years.  Now we have the real prospect of a collapse of the Euro.  But gold paradoxically is bearish!!  Even in a bearish market, one would expect the rush into gold to cause a spike in the market but nothing interrupts the orderly progress from 1920 to 1400 levels.  What is keeping gold down?
  4. $-Index I use the $-Index as a proxy for the real greenback.  If you expect the Euro to collapse, you would expect the $ to be whooping it all the way to parity.  Yuan is inconvertible, Japan has a debt of 300% of its GDP and hardly any other currency exists.  But the $ is an orderly 81.5 and the momentum up gives no indication it can even make it to 88, forget parity or higher.  This when there is no other currency left?  Why so? On the other hand, an orderly fall back of the $-Index towards 0.72 is more than likely.


Now consider the scenario where Uncle Sam agrees to save the Euro under a few stiff conditions:


  1. Germany will relent on its austerity for PIGS else the US will step in to buy Italian or Spanish debt directly in their domestic market.  That would undermine Germany in the EU, prop up the Euro and effectively kill all EU independence from the US.  Would the Europeans wish to see that?  So why would not Germany fall in line with US wishes and strike a deal with PIGS that is less onerous than now?  In return the US FeD will backstop the ECB with QE3?  The details don’t matter.  Ultimately, the US steps in to save the world because there is no other way to save itself.  Accounts for the steady Euro?
  2. Uncle Sam in turn gets the EU to back it fully in terms of sanctions on Iran and technology denial to China.  KSA will meet any supply shortfalls at its preferred price, the main and the largest crude buyer now being China, not the US.  KSA wants Iran sanctioned and hogtied.  China needs the KSA crude badly enough not to upset KSA.  Russia will play ball reluctantly. India can take a hike.  Accounts for the fat risk premium in the oil prices as sanctions cut Iranian crude availability on the markets?
  3. Gold isn’t up to its usual panic levels because informed players see no panic.  In any case everybody is up to their gills in gold expecting all sorts of poppycock scenarios that don’t exist under fiat currencies.  Nevertheless prolonged uncertainty in Iran will provide a floor to gold prices at $1400 or thereabouts.
  4. What is almost certain is that the fat risk premium in the oil price will limit any recovery.  So for all that FeD may do via QE3 for the Euro, slow growth is a given and that accounts for the bearish equities.  One caveat though.  An announced QE3 for the Euro could result in a spike in US equities and the charts reflect that possibility.

All told what does the analysis using just market data indicate as the two or three likely geopolitical outcomes?

  1. Germany will have to back off from the austerity for PIGS under US pressure and or threat.  The US not gonna let Germany trip the world into a recession and every Tom, Dick and Harry will support the US.  WILL IT HAPPEN?  I don’t know.  But markets are consistent with this scenario.
  2. EU will hop on board to squeeze the daylights out of the current regime in Iran.  China will bend to US and KSA pressure at a price. Japan like India has no options. Russia will make noises to stay on the right side of Iran but will cooperate.  Iran’s falling output will keep oil prices elevated.  KSA will collect from China & Japan and split proceeds with US for more arms.
  3. India will learn the hard way that it is still very much a unipolar world and you can’t play both sides for the best bargain if you are a two-bit player.  For non-alignment to work you have to a very strong player – almost equal.  Nehru thought numbers could make up for strength but he was wrong.  The neo-nonaligned forget we don’t have even numbers now.  That’s consistent with Indian markets tanking all the way to 12,500 most of 2012.
  4. Overall markets are fairly orderly factoring in a world much like now, growing much like now, and if Obama actually wins over Germany with QE3, he will be back in the Whitehouse.

As I said this all for fun and debate.  Think about it.

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