Home > Uncategorized > MARKET NOTES: How far can this rally go in time and price?

MARKET NOTES: How far can this rally go in time and price?



MARKET NOTES:  How far can this rally go in time and price?



Bear market rallies, and there is no doubt in my mind that this is one such, are notoriously fickle and hard to predict in terms of price and time.  Being driven by trapped short covering, their momentum is determined purely by market technical positions, data for which one is not privy to.  Hence we have to look across markets for tell tale sign of exhaustion and other similar clues.  In terms of trading strategy, that means taking your profits when your target is met and having the self-discipline to stay out of the market till such time the market clearly says which way it is going.


But first we must reestablish that this is indeed a bear rally for the rest of the thesis to be valid.  Hence a look at the NYSE Composite Index that represents the entire universe of stocks on the NYSE, but also one traders rarely look at for reasons I can fathom but not guess!



NYSE Composite:  This index made an all time high of 10,395 in October 2007.  In the following crash it made a low of 4186 in March 2009.  It has since rallied making a high of 8700 in March 2011.  What is significant about this March 2011 top is that [a] it matches a very strong and significant overhead resistance spanning from May 2006 to date and [b] the level achieved is much lower in relative term from the 2007 top when compared to say DJIA or the S&P 500.  In other words the broader universe of stocks on the NYSE did not rally as much as the main indices in May 2011.


From the top at 8,700 in May 2011, the index made a low of 6,420 in October 2011.  We are in the rally from that started from this point and the question is how far can it go until we are out of the bear market completely.  A trend line from the top in 2007 to the top in May 2011 makes the equation obvious.  The NYSE Composite index can rally up to 8,500 before long term buy & hold kind of investors start fretting about being left out of a bull market.  We are currently at 8,100 well below the point.  Note other indices are like the S&P 500 and the DJIA are much closer to the corresponding point on their charts while the NASDAQ has actually broke out.  However these indices are narrower than the NYSE Composite.  My sense is that the above confirms we are still in a bear rally.



NASDAQ:  As indicated in the last blog post, this index is the most bullish component in the market indices, and within it, the sub-universe of tech stocks shows the most momentum, the darling being Apple.


Apple had a key reversal day on 15th February accompanied by a volume that was the highest in recent months and roughly 8 times the daily average.  It has clawed back about half that loss on much reduced volume.  Nevertheless, the probability that Apple has reversed course after a long and ferocious parabolic run up remains strong.  That’s a sign of what may be in store for other tech stocks as well.


Returning to the index, as indicated in the last blog post, NASDAQ has a target of 3050 on the charts followed by more significant overhead at 3200.  As far as the NASDAQ goes, I am inclined to the view that the index completed its correction from the peak of 5150 in March 2000 on 9th March 2009 and the rally that we are seeing on the NASDAQ is the first leg of a new bull market in tech & biotech stocks.  This hypothesis would support the significant break out after 11 years on this index.  If my view is correct, NASDAQ can peak around 3200 in the 2nd week of March before correcting for the rally up from March 2009 lows.  In short, while NASDAQ has broken out bullishly, it will nevertheless correct with the rest of the market, only the nature of correction being different.




S&P 500:  My target for the index was 1350 which as been achieved.  The index’s previous top stands at 1369.  There is no reason why that cannot be breached but if it does so, it would be a surprise.  After the 1370 area, significant overhead holds at 1427.  Breaching that resistance would be heroic miracle.  But there is nothing on the charts to show exhaustion.  I plan to stay out of the market regardless of where the S&P 500 goes.



$-Index:  The $ is stuck around 79.5 waiting to see how the Greek cookie crumbles.  The index has an overhead resistance at 80.5 and it could spike into that area on a Greek default.  Barring that, the index continues to be in bear trend down into the 76.5 area.  A spike on Greek default will not change the overall trend.  Nice trading opportunity coming up here.



10YR US Treasury Notes:  This index made a top 132.281 which looks suspiciously like a triple top in that area and is now headed down to the 130 area.  Track this closely because a break below 130 will ring in a worldwide reversal in interest rates.  The index currently stands at 130.984.



Euro-$:  The Euro-$ currently stands at 1.3150.  If there is a Greek default, one has no clue where the Euro will be at; but it will in time emerge stronger, not weaker, on a Greek exit.  Therefore any collapse would be a buying opportunity in my view.  Having said that, with such a huge event risk, the best position is 0-0.



INR:  The $ is on the way up against the Rupee in its major trend.  However it turned down from 49.77 into a short-term correction.  In my view this correction is unlikely to breach 48.5.  In terms of time, $ would be ranged between 48.5 to 49.8 for some more time before it makes a break for higher levels.  The $ has a definite upward bias though.



Gold:  One would have expected Gold to show some pulse with rumors of an imminent Greek default.  Instead Gold continued in a rather lame and tame descent and is currently at $1722.  If Gold can’t rally amidst a major currency default, there isn’t much to hold the metal here at these elevated prices for long.  Maintain my bearish view.



NYMEX Crude:  Crude closed the Friday session just under its breakout point at $103.75.  Its next major overhead lies at $110.  While I am bearish on crude a spike in the event of turbulence in the Middle East can’t be ruled out.  Incidentally, crude is poised at a potential triple top in the 103.5 area.  A spike would negate that however.



Shanghai Composite:  Chinese stocks continued their steady, boring march up after confirming 2323 as the new higher floor.  Expect nothing spectacular in the index in the early stages of a rally.  Continue to be bullish here with the caveat that the index will adjust its pace & moves to what happens in world markets, but with a bullish bias.



Sensex:  Sensex illustrates the hazards of calling bear rallies!  First, it gapped up from 17,880 to 1800 trapping the wretched bears and yanking them all the way to 18,200.  Many would have got butchered.  Then after a one-day correction, it gapped up again from 18,160 to 18,400 before closing down 18,290.  That reads like a absolutely gory tale of bear slaughter.  It also means these are exhaustion gaps; or a way of substituting acceleration for actual price moves upwards signaling the end is nigh.  Hard to say when the last bear will be quartered and killed but rest assured no bull wants to hold stocks at these levels.  Till the market says otherwise, am bearish on the Sensex.




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.

Categories: Uncategorized
  1. May 26, 2012 at 8:39 am

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