Home > Uncategorized > MARKET NOTES: The process of the top formation can be boring, and disconcerting

MARKET NOTES: The process of the top formation can be boring, and disconcerting

MARKET NOTES:  The process of the top formation can be boring, and disconcerting.



In so far as the World equity markets were concerned, the past week saw most of them make new highs.  Market turning points are always disconcerting for those trying to call tops and bottoms – usually a fool’s errand.  Nevertheless, one has to make sense out of the markets while respecting their verdict.  Markets by their nature test conviction.  If they didn’t, trading would be child’s play.  With that in mind let us see what the markets are trying to tell us.  This time we look at the US and major EU markets because the onset of an intermediate correction in Indian markets is more or less confirmed.



CAC:  THE French market looks to be the most bullish in the near term because [a] it has long under-performed its peers in the EU and [b] it never made it anywhere near to a new high in the madness that gripped other markets in the second half of 2007.  Instead CAC has had an orderly correction from the high of 6950 in January 2000 to a low 2700 in November 2012.  The correction, or bear market in French stocks, has spanned 12 years.  My preferred wave count for CAC says the French market began the 1st leg of an impulse wave up from a low of 2485 in September 2009 and completed the leg up at 4160 in February of 2011.  The fall from there to 2700 was corrective in nature and that was completed in by end of September 2011.  CAC hasn’t finished it correction though.  A wave II correction usually has rounded tops and two legs to the fall, the first of which is usually very sharp and the second a dilating top stretched out over time.  CAC is in the second leg.  Therefore, the prognosis must be that CAC could continue its rise with the next target at 3800.  Can it go beyond 4160?  That is possible but unlikely.  Near term then CAC is bullish, in a new bull market, but it is in a wave II correction mode.



DAX:  Unlike its French cousins, DAX did equal the highs of 2000 in 2007 along with the rest of the world markets.  So its wave structure is more in tune with US markets than the French.  Nevertheless, it is instructive to analyze it like the CAC to see what shows up.  And the answer is the same as that for CAC.  Namely, the correction in the German markets can be said to have begun from a top of 8130 in March of 2000 and completed its course in March of 2009.  Incidentally, while not a conventional position, that view can be justified even in the case of S&P500. If that be true, the run up from March 2009 to 7600 in May 2011 was the first leg up of a new bull markets and the run down from there the first sharp leg of a Wave II correction that will stretch out in time.  It could even make a new high like its American cousins.  But the Wave structure leaves little doubt that [a] DAX is in a new bull market, [b] has completed the first leg up and [c] is now into an extended wave II correction that can make a new high but not for any significant length of time or very significantly higher than 7600.  DAX, have broken through 7050 has a target of 7400 next.  Hard to say when it will top out in terms of time or price.



FTSE:   Not surprisingly, the FTSE is even closer to its Atlantic cousins than the DAX or the CAC but still manages to retain its European character.  The analysis, using CAC as template is straightforward.  FTSE completed its major, multiyear correction from 6960 in 2000 in March 2009.  The run up from March 2009 to July 2011 is the first leg up and from there on we go into a Wave II correction that will stretch out over a fairly long period of time though a new high beyond 6100 is not ruled out.  If the new high does happen, it is unlike to be significantly higher or hold for very long.  The next target for FTSE is 6100.



S&P 500:  Having discussed the CAC structure for the 3 indices, the case for S&P 500 should be straightforward but isn’t.  S&P500 incorporates the NASDAQ that has followed an independent path since the 2000 tech bubble.  It has completed its correction and has broken out after 11 years.  That makes S&P500 a lot more bullish in its first leg run up that it would be in the absence of the tech stocks.  Nevertheless, the run up in the S&P 500 from 668 in March 2009 to 1354 in May 2011 can be seen as the first wave of a new bull market.  That puts S&P 500 in a wave II correction the first leg of which took it down to 1074.  The new high since then would still fall into the pattern of a wave II correction though not in the conventional sense.  But, as in the case of European markets, a high beyond the 1354-point on S&P 500 is unlikely to be sustained for long.  Having broken through, it become hard to predict just when the market will turn down.  Prudence however demands that one stay on the sidelines and wait to sell short till the market itself signals a convincing turn in trend.  As I have stressed repeatedly while indicating a top, early bears are easy meat at market tops.  So exercise caution even as one recognizes one is near a top.



Gold:  Gold needs to fall below $1600 before it can show any significant bounce up.  Unless Gold dips significantly below 1600 level and stays there for a while, the prospects for a bounce back in the price before July this year are rather dim.



Sensex:  There is still a slim possibility that Sensex could lunge for 18,500 before the end of March in line with World markets.  If it does so, the high may not last very long.  Every other thing points to a fairly longish leg of correction down from 18,500 to 15,000 till the end of this year.  That will tie in nicely with world markets if my prognosis holds out.



Will look at Commodities and Currencies in a separate blog post during the week.




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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