Home > Uncategorized > MARKET NOTES: The major trend across markets remains down

MARKET NOTES: The major trend across markets remains down

MARKET NOTES:  The major trend across markets remains down



Markets across all asset classes are in turmoil.  With torrents of news flow, mostly bearish, and heightened volatility, making sense of the markets is like solving a huge jigsaw puzzle made up of a large number of other jigsaw puzzles.  Not all of it makes sense at any given point in time, but seen as a process over time, the pieces do fall in place, sometimes much after the events themselves have passed on.  We appear to be halfway through such a period of flux, in price if not time.  So treat what follows with a bit of caution.  I have done my best to keep things simple and sensible.



Gold:  As blogged often here, 1550 was the target for gold for the correction that commenced in September 2011 from a price level of 1920.  That was achieved on 16th May when gold made a low of $1527 and closed at $1538.  Had tweeted that shorts should take partial profits then.  Gold has since bounced back to a high of $1597, closing last week 1591.8.  Where does it go from here?


First off, in term of time, if not price, the correction in Gold is not yet over.  That period ends some time in July.  Secondly, a reactive bounce from 1550 region was to be expected and has happened.  A decisive cross above $1620 would be the first signal that the price may have reversed.  Until then, the bounce from $1530 is merely a reactive bounce that could be reversed in the ensuing week.


Can Gold go lower than the low of $1523 that it made in December last year?  The answer is yes.  A significant low below $1520 will signal that the gold move down from $1920 is not just a correction but also an impulse wave down with a much lower target than $1520.  Hence price action over the next two weeks will tell us where the market intends to go next.  Until then, it is best to stay on the sidelines for traders.



Silver:  Silver, much like gold, bounced from its floor in the region of $26 to close the week at $27.8.  Silver could rise further to test its first overhead resistance at $30.  A firm break above $30 would be the first indication of a price reversal.  There is little on the Silver chart to suggest the metal has bottomed out.  Therefore, it can return to test $26 again and possibly breach the level.  There is no bullish case for Silver yet.



$-Index:  This blog has been bullish on the $ when the world was bear.  [And bearish on gold when the world was a bull.]  The odd fact about the $ is that it should be correcting down to sub-75 levels when it is actually perched close to its first major overhead resistance at 82.  And this happens at a time when the yields on 10 year US treasury notes are at lowest being just 172 bps.  It is a bizarre world!


A break above 82 would see the $ shoot towards 90 and it is possible that a break above 82 could occur over the next two weeks if the Euro$ turmoil sends the Euro significantly below its floor of 1.26.  On the other hand, the downside in the $ is no more than 79.5.  So the trend favors the bulls in the mighty $.  So how come it is the $ that is being debased?  It would take too much time to address that conundrum.  I am not a $ bear.



Euro$:  As expected by this blog, the Euro collapsed from the level of 1.32 to make a low of 1.26930 during the week.  Expect the Euro to rigorously test the 1.26 level in the coming week and perhaps breach it.  Having said that, the Euro is in oversold territory and an immediate decisive breach of 1.26 is highly unlikely.  All bets would be off if Greece exists the Euro.


My gut feel says the authorities will let the markets fully price in a Greek exit before it happens to take the sting out of the event.  That process will be signaled on a decisive breach of 1.26 to test the floor at 1.20 where the Euro commenced its life as a currency.  So watch prices to discern policy.  Not a time to trade the Euro unless you are one of those policy wonks who bet on event risk.



$-INR:  As predicted in this blog month’s back, the INR not only tested its previous high at 54.33 but also decisively breached it.  We are now in uncharted territory.  I am not going to predict prices based on Fibonacci numbers or other such techniques because it makes no sense to me.  Instead I am going to concentrate on getting the direction of the Rupee moves right over the next few weeks.


Firstly, note that in terms of time and the good round figure of 20% devaluation, the policy intent behind the INR move is probably complete at 54.50.  In other words, GoI probably doesn’t INTEND further devaluation of the INR and that is confirmed by the chart pattern thus far.  Secondly, note that the $ is bullish against most major currencies and may appreciate against the INR irrespective of GoI intent.  Lastly, it will be a good 2 quarters before the new level of $ vs. INR impacts exporters like the software companies to deliver more $s in the markets.  In all, the $ could rise higher to say 57/58.5 range in order to create a new trading range with a floor of 54.5.


In short I expect the $ to trade in the 54.5 to 58 trading range for a few months before long term trends assert themselves.  A fall below 54 is highly unlikely in my view.  The range extension to 56/57.5 should happen over the next few weeks before the lower bound is tested.  An extension of the trading range to 56 would also signal further weakness in the INR in the years before 2014.



BSE 500:  As readers may have noted, I am highly suspicious of narrowly defined popular indices of the Sensex or Nifty kind, which are often used at market extremes to generate confusing signals.  Last week we looked at DEFTY to see how we were in a bear market that started in January 2007.  This week we look at the BSE 500 index to confirm the prognosis from the DEFTY.


Note, the BSE 500 never made a double top or new high in November 2010 unlike the Sensex or the Nifty.  That confirms that the broader universe of stocks in the Indian markets is in a long-term bear market that started in January 2007.  The message from the DEFTY was not an isolated one colored by an exclusive FII perspective.


Where does the market go from here?  First some numbers.  The BSE 500 made a top of 8960 in January 2007 and a low 2962 in March 2009.  It then bounced to 8420 in November 2010 and we are in a down move from that point on to the present level of 6115.  The index made a low of 5730 in this down move in December 2011.


The minimum target for this down move then becomes 5730, which corresponds to roughly 15,000 on the Sensex.  There is no major floor between the current level and 5730 so expect this level to be tested in the next 2 weeks.


Will it stop there?  That is for the market to tell us by its reaction to the 5730 area.  I wouldn’t bet on the outcome even in the event of a small bounce from there.  In terms of time, we are in the middle of one of the most destructive waves in a bear market.  It will take a couple of months to fully unfold.



NYSE Composite:  The NYSE Composite index best illustrates why narrower indices like DOW are best used with some caution.  Unlike the DOW, there is much more clarity in the broader market.  That said, the broader index is firmly set on the path down to 6500 area.  It is not oversold and has plenty of time to get there.  It had a minor floor at 7500, which was breached last week.  Minor pullbacks apart, the next level to watch for are 6,500.  That corresponds to the 1100 area on the S&P 500.



Will take a look at EU markets and agricultural commodities in a separate blog by middle of this 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.

Categories: Uncategorized
  1. sourabh bansal
    May 22, 2012 at 10:00 am

    excellent research

  2. sourabh bansal
    May 22, 2012 at 10:03 am

    sonali but if v speak about indian investor regarding gold prices its all the same no variation because of dollar prices………..so after gold being correcting we cant have the advantage of buying it.

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