Home > Uncategorized > MARKET NOTES: The Greek will vote with their heads, not hearts

MARKET NOTES: The Greek will vote with their heads, not hearts

MARKET NOTES:  The Greek will vote with their heads, not hearts



Dollar Index [DXY]:  To my mind the most important development in the word markets were the signaling of a correction to the value of the Dollar.  One may recall that DXY entered its just ended bullish run in May 2011 at a level of 72.86.  The top of the bull run was marked by a high of 83.67 achieved on 1st June 2012.  The failure to penetrate this overhead resistance, which corresponds to a high made in August 2010, has triggered a correction.


DXY has since corrected and closed the week at 81.6050.  It could find some support at the 81.50 in the ensuing week but the trend has reversed and the first target is 80.5 followed by a deeper target at 78.  However, the 78 levels may take a while to achieve.  We can expect the DXY to consolidate above 80.5 for a week or two before breaching the 80.5 level.


DXY bullishness over the last 1 year has been the key driver behind the reversal in asset prices over a range of commodities and equities.  It acts with a lag though.  Since we are in the very early stages of a correction, it is hard to see how other asset prices will react.  But the downward momentum in their prices should abate.


Unless, the trend line running through the just ended bullish run [drawn by connecting the lows of 29th August 2011, and 30th April 2012] is significantly breached, the ensuing correction should be seen as normal correction that doesn’t end the bull run.  Therefore, over the longer term, DXY continues to remain bullish.



Euro$ [EURUSD]:  The Euro$ is crucially positioned at 1.2636 having made a low of 1.22869 during the previous week.  The Greeks are voting in an election just as I write this blog and the results could have a significant bearing on the direction of the next lurch in the Euro$.  But the charts have story to tell and I read charts not events.  So I will just stick to what the charts are saying.


Barring a lurch back to 1.2250 in the next few days on an adverse Greek result, the charts say we may at the end of a bearish run the Euro$ for now.  That reading ties in with my read on the $-Index above.  If my wave count for EURUSD is correct, we are now entering a fairly violent upward correction in the EURUSD pair that could last for a while.  Excluding the reflexive jerks for any adverse Greek result, the Euro can head for the 1.32 level once the 1.2650 level is taken out.


So while not ruling out another short lurch to the downside, I dare say the Euro needs to correct and consolidate well above 1.26 for an extended period of time before deciding where it wants to go.  Going by the charts, the doom and gloom on the break up of the Euro appears highly overdone, whichever way the Greeks vote.



Gold:  Broadly speaking the correction in gold that began in September 2011 is over in terms of price though it has 2 to 3 weeks more to run in terms of time.  Gold closed the week $1626.26 after having made a low of 1561.44.


The last two weeks of an extended correction are impossible to predict which is why wave 5 failures are notoriously common.  So it is impossible to predict if gold will retest $1522 in the next two weeks.  It could, but there is certainty that professional traders will give retail investors such easy buying opportunities.


On a breach of 1650, the probability of a drop back to 1522 recedes into nothing.  Below 1650 there is some hope for another buying opportunity.  Investors can buy gold in their comfort zone with a stop loss placed just below 1520.  Barring the last lurch down I am now officially no longer a bear in gold.



Long term, gold will almost certainly take a shy at its previous top of 1920.  We won’t know what it intends to do there just as yet.  Mind the climb to 1920 will neither be smooth nor one way.  The pull back may provide clues to its nature [reactive or impulsive] as it is transcribed on charts.



WTI Crude:  As discussed in the last post, NYMEX crude had a medium term target of $76 and that continues to be the case.  Maintain my view that what we are seeing is a “cup & handle” correction to the crude rise from 32.5 in August 2009 to high of 114.18 in April 2011.  Crude continues to be bullish long-term.


The question of course is if crude will definitely hit 76 before turning up.  The correction in DXY discussed above reduces the probability somewhat.  The target of 76 should remain in place unless crude turns around and takes out $90, an unlikely possibility.


India should note the respite in crude prices that we are enjoying is a fleeting opportunity to reform the POL sector painlessly.  It is highly unlikely that the low crude prices will last beyond September this year.  In fact they could turn up from $80 level itself some time in July.  Pity nobody is accountable in GoI for missed opportunities.



$-INR:  The $ appears to be consolidating above 54.3 and below 56.5 as expected.  It closed the week 55.3850.  As discussed above, the $ has now entered a correction, and hence the pressure on the INR stemming from $ appreciation in the world currency markets should abate significantly.  The charts do not presage any Greek tragedy.  So the correction in the value of the $ in Indian markets should continue for quite sometime.


With trading curbs in place and a whole host of restrictions, RBI could use the respite in the currency markets to lift them one by one.  It would be a mistake to let the $ fall below 54.3 in my opinion.  RBI would be well advised to mop any excess $ at that level to build up it reserves.  The $ should stay above 54.3 until government takes adequate policy measures to shore up exports, remove barriers to FDI and FII flows and gets its fiscal deficit under control.  POL pass through has been too small.  Without reforms there it would madness to let the $ fall below 54.30.




S&P 500 [SPX]:  SPX closed the week at 1342.84, pretty close to its high for the week at 1343.32.  As discussed in the last blog post, we are in the middle of a pull back in the US equity markets after its recent low 1267 in the first week of June.


In theory the pullback has a target equal to the previous top, which is 1422.  But considering the distance retraced so far, the probability it will get there is small.  The index has an overhead resistance at 1350.  A breach of that level would be significant but is unlikely in my view.  On turning down from 1350, the index could retest 1270 again.  Not bullish on US equity markets for now.



NIFTY:  As discussed in the last blog post, Nifty had a target of 5168 in this rally from 4770.  A breach of that level to the upside would be very surprising.  We are in the last leg of the current correction from the top at 6240.  Sharp rallies cannot be ruled out at this stage.  On the other hand for a convincing end to the current correction NIFTY needs to establish 4500 as firm inviolate bottom and that can only happen by retesting it.


Either way, logically the market should turn down from 5168 and then the fall from there to 4500 would be a good time to accumulate blue chips on the Indian 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.


Categories: Uncategorized
  1. Debasish
    June 17, 2012 at 11:36 am

    It would be good to have crude at $76/bbl and Dollar index at 78 (0r Rupee at less than Rs 50 to $) – will be good both for Current A/C def and high st petrol prices for consumers.

    My 31st Dec target:

    Dollar Index: 74
    Gold: $1480
    Crude: $70
    Nifty: 5800
    Rupee: 49/$

    As an energy sector person, my wish is to have coal and LNG correct a lot from here. Will be good for India.

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