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Grappling with a Pig in the mud pit

June 13, 2012 5 comments

Grappling with a Pig in the mud pit

 

Grappling with a pig in the mud pit is a scenario that plays out every so often on a twitter.  The moment your follower count exceeds 1000, you are game to artists who practice this form of wrestling.  Their motivations vary.  Some are just hoping you will give them a reply.  Others want to be part of the conversation.  A few want an RT for their blog, tweet or just their handle.  And then there are the trolls whose aim is to get you down in the mud pit to show others of their ilk that you look just as ugly as them in the mud.  A further refinement on the last category is an organized wolf-pack of trolls acting in concert.  Their aim is the same – to knock you off your pedestal and into the mud pit with them – but their tactics are much more refined, bandwidth intensive and coordinated.  How do you deal with these artists?

 

The first and foremost step that these artists need to accomplish is to engage you.  A volley of RTs for your tweets, a derisive comment on what you say, direct messages and challenges, and forwarding others comments or outright abuse to you are a mix of tactics employed to engage you and draw you into a conversation.  Once you start responding, the next leg of actually provoking a verbal duel follows.  The subject doesn’t matter really though of course it helps your opponent if he/she knows something of the topic on which he hooks his challenge.  What you say is irrelevant because the artist will distort and rubbish it anyway.  The end game is the same.  It is to deflate you to the same level as that of the pig in the mud sty.  So what if the artist had to herself get dirty?  That’s no problem to her at all while it hurts you.  Can such a game, loaded as it is against you, ever be won?  Note variants of this game are used by school and college kids for social climbing and so most people use this strategy at some time; especially new comers who have nothing to lose by adopting it  even if their intentions are benign.  A repeated use of such strategies is often no different from blackmail until you give in.

 

Note the strategy can have a benign purpose even if it is attention seeking, annoying and distracting.  If your pig only wants a little help to get started on twitter it best to help when you can without annoying your existing followers with indiscriminate RTs and other annoyances.  The trick is to be able to separate out the benign pigs from those bent on getting you to be pig like them in their sty.

 

But how do you deal with a pig who worms his way in, so to speak, and you have no option but to engage with?

 

There are 3 things the pig needs to declare victory:  [1] To get you to reply to a series of exchanges each of which is cleverly continued by  inserting a sting in the tail that you feel impelled to correct with your next tweet only to find the reply similarly twisted again and so forth.  [2] To get you angry, annoyed, distracted into any error that can then be echoed across twitter as a victory pennant.  [3] A public celebration of the coup by exchanging congratulatory RTs with fellow artists which is what increases the worth of the artist in the eyes of compatriots.  As I said the pattern will go through no matter what you say or do so long as you chose to engage or are compelled to engage the artist.

 

Overall the game is akin to blackmail and your vulnerability comes from your high follower count.  The more followers you have the more vulnerable you are to this play, benign or virulent doesn’t matter.  And the higher is the pigs pay off in terms of exposure to your & his or her followers. The strategy to deal with the malevolent pigs is therefore the same as the one you would use to deal with a blackmailer.

 

Begin by the general policy of ignoring all unsolicited tweets unless you have had the time to look up the potential pig’s twitter page, blog if any, and his or her twitter stream of at least 20 to 30 tweets.  Never ever reply to a tweet from a new source without this due diligence.  A lot of grief comes from ignoring this necessary piece of homework.

 

Once you have done your due diligence, try and put the source into the benign category, reply politely if possible, and watch the exchanges develop.  If they prove benign and merit help, be free with whatever you can to help the tweeter along.  You were once in a similar situation and you know how tough it is get your first 500 followers.  So help others but without annoying your existing followers.  Who knows the tactic may pay off in a genuine relationship on twitter.

 

What if they are not benign?  Well there is only one strategy to handle a blackmailer; and that is to refuse to play.  Easier said than done but really, there is no alternative strategy to deal with a blackmailer.  Either refuse to play or submit forever.  And submission is not a strategy.   Since there is no earthly reason why you should ever submit to anyone on twitter, refusing to play the game is the easiest and the best way out.  Simply use that block button and ignore all echoes!

 

Would you consider hitting back at a blackmailer?  Mind this is different from the issue of playing the blackmailer’s game on his or her proposition of blackmailing you.  Instead envisage a scenario where you have done your research on your tormentor and find a vulnerability that you can exploit independently of his blackmailing game.  Would you hit out at him/her?

 

The answer to that must also be a resounding no.  There is no point in joining the pigs in the pig sty; by their invitation or by inviting them yourself, because the end result is the same.  You become the pig in their pig sty like them.  Moreover, expect the opposition to be as smart as you are at the very least. So neither let them make you a pig nor be tempted into being a pig yourself.

 

Keep out of all pig sties and leave the pigs alone!

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MARKET NOTES: Gold edges towards the end of a correction

MARKET NOTES:  Gold edges towards the end of a correction

 

Gold [GCQ2]:  As blogged in the recent past, gold is heading towards the end of its correction from its recent all time high of $1920 made in June.  The last leg of a correction is usually marked by sharp rallies and equally sudden drops as short covering sets in.  We are seeing that happen in gold.  After making a low of $1531, Gold flared up to $1640 and then fell equally sharply to $1561 before closing the week at $1593.  We can expect such volatile movements to continue till the middle of July.

Most position traders would have covered their shorts at $1550 as advocated in my blogs.  The question really is should one go long in gold here and if so at what price levels.  If Gold doesn’t breach $1520 over the next few days the probability of a crash in gold below that level recedes.  As always it’s difficult to predict how the cookie crumbles.  Position traders could start slow accumulation in the $1560 range with a stop loss below $1520. The risk of a breakdown in Gold price to $1430 remains. However, the price action in gold indicates that the risk of such a breakdown in receding with time.

This is not to imply gold has turned bullish.  That will happen only when it breaks atop $1920.  All one can say is that the metal will try to aim for a pull back to the previous top over the next several after the correction.  Its price action as it attempts to do so over several weeks will tell us where it intends to go.  This commentary is merely flagging a trend change that appears imminent in the metal.

 

$-Index [DXY]:  The Dollar has had a great bullish run from the 78.5 region in April this year to its major resistance at 83.65 on 31st May.  Since then it has been consolidating in a range between 82 [which represent the top of its last rally in January] and just below 83.5.  The rally is by no means over.  The ultimate target of this Dollar rally could be as high as 90.

DXY closed last week at 82.56.  The consolidation between 82 and 83.5 could continue for a while before a breakout.  I remain bullish on the $.  Furthermore, the bullishness in the $ may have major implications for the INR.

 

WTI Crude [CLN2]:  Crude closed the week at $84.34.  As indicated in the last blog post, crude in an intermediate decline with a target of $75 but is consolidating between $81 and $86 for the time being.  Crude could pull up next week to even as high as $90 for a short while before the final plunge to the $80 region.

As warned before, in my view crude is merely correcting for the bull run from December 2008 to May 2011.  By that wave count, we are in the last leg of the wave C correction in crude with a target of $75.  Wave C could terminate as early as end of August.

As mentioned in my last blog post, India would be foolish to bank on the falling crude prices.  It has a small window of opportunity between now and end August to reform its oil sector if it wants to with minimal market disruption.  Whether or not it grabs the opportunity is up to somnolent & moribund government that simply isn’t alive to markets and market trends.

 

Silver:  Silver closed last week $28.47.  It appears on course to test its first target at $26.  The metal could rally over the next week and exhibit violent price movements in tandem with Gold.  However, the long term picture remains bearish and the price movements in the metal will be more towards $26 than away from it to the top.  Continue to be bearish in the metal.

The probability of a price breakdown below $26 appears to be receding for now.  After hitting a low in the region of $26 by end July Silver could see a rally in tandem with gold and the future price action will depend on whether the metal can make a new high in the months that follow.  Net net, bears should look to cover shorts in the $26 region.

 

Euro-$ [EURUSD]:  Euro made a low of 1.2286 against the $ before rallying up to 1.26 last week.  It dutifully turned down from 1.26 to close at 1.2516.

The Euro has now entered a crucial period that will end at the end of July much like Gold and the $.  Its first price target now is $1.18.  Expect the Euro to be rigorously tested against the target of $1.18 be fore a substantial rally.  I remain bearish on the Euro.

 

$-INR :  The $ is consolidating in the 54.5 to 57 range and this consolidation is likely to continue for a few weeks more before the $ attempts to make a new high against the INR.

Long term the $ can move in one of the two ways.  My preferred view is that the $ moves to make a new high in the 58 to 60 range over the next few months, rising in tandem with DXY in the international markets.  Recall DXY, THE $-Index can test 90 [as compared to 82 now] over the next few months.  Following the new high, the $ then could see a multi-year consolidation in the 60 to 50 range.

The other scenario is for the $ to break the floor at 54.5 and consolidate between 56 and 50 before moving up against the Rupee.

The anticipated moves for the $ in international markets favor the first scenario.  Furthermore, RBI too should favor the first scenario as a matter of strategy with a view to minimizing its outflow of reserves at this point when BoP is considerably strained.  That choice will also help stem gold imports as gold once again turns bullish in international markets.

 

S&P 500 [SPX]:  The US index [SPX] closed the week at 1325.66 after making a low of 1267.38 on 1st June.  With this move SPX has entered a consolidation zone and a breakout from either side of the 1270-1340 will determine the ultimate direction of the US markets.

Watch the consolidation carefully.  Usually breakouts from such consolidation zones are in direction of the main trend which remains down.  Nevertheless, a full pullback to top of the range at 1430 cannot be ruled out.  Remain neutral with a bearish bias until the market breaks either way.

 

NIFTY:  Nifty made a low of 4831 during the week before pulling up and closing the week at 5068.  In my view the Nifty is highly unlikely to breach the overhead resistance at 5160 though it could continue to stay at the higher end of the trading range before heading down again.

Nifty too remains firmly in a downtrend until a decisive break of the overhead resistance at 5160 takes place.  The first target for the downtrend remains 4750 followed by a deeper target at 4350.

As mentioned last week, this the fag end of the correction in the Nifty.  So while the markets will undoubtedly fall, they will also present buying opportunities.  So research your buy lists.

 

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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Where we fail: Individual brilliance and collective productivity

June 6, 2012 4 comments

Individual brilliance and collective productivity

 

 

Am writing this sitting in a train, more out of sheer frustration, than something that I had planned to do.  What I would dearly love to know at this point is the price of DXY, the Dollar Index and the EURUSD rate.  Armed with 2 laptops, 2 smart phones, and a 3G to Wi-Fi router modem, sitting in the First Class coupe of a superfast train still in Mumbai, I am unable to get the rate. None of the phones or modem can catch the broadband necessary to load Reuters or Bloomberg.  I tried asking for the rate on twitter that loads intermittently.  No replies that I can see.  That is just another grim confirmation that despite all the progress we have made, we just cannot take any service for granted.  I don’t think we as a society realize how much we lose in terms of additional layers of cost that get added to simple things because we cannot take them for granted.  Consider.

 

 

I do not need two laptops, 2 smart phones with three different ISPs, and a 3G Wi-Fi router as an additional back up.  I am forced to duplicate this expensive equipment to be sure that they work when I need them because individual vendors are not reliable.  It doesn’t matter that they fail only 5% of the time and work 95% of the time.  Because, I need 100% reliability, I am forced to more than double my investment in equipment to cope with the unreliability of the service.  Even so it has failed me.  I may or may not end up loosing money because of this shoddy service.  That is different matter.  But the very fact that I have to more than double my investment in equipment to cope with unreliable service adds to my costs and leaves me at crippling disadvantage in relation to my competitors.

 

 

It is not just phones or bandwidth.  These things span every aspect of our infrastructure, from back up generators for power, public transportation systems, to shopping malls.  The inability to take anything for granted compels you arrange for back ups that doubles and triples your investment just to level with competition.  It is not that we as individuals are inefficient, lackadaisical, or indolent.  Rather, it is that we have not understood productivity in the modern world.  Personal productivity is about how effectively you do your job.  Person for person, Indians are as good as any of the best there is.  But productivity in the modern world is more complex than just personal efficiency and effectiveness.  You also have to be collectively productive because today a person’s output depends less and less on his or her personal effort and more and more on the support system of which he or she is a part of.  My productivity is a function of my own effort, but also that of the support I get from the public infrastructure around me, the organization that I may be part of, my colleagues who work with me & complement my work, and a whole host of other things not excluding the general level of wages and incentives that the economy sets up for my kind of work.  It is here, in the collective productivity sphere, where collaboration with others is concerned, that we fail miserably.

 

 

One aspect of the problem is the lack of realization that collective productivity is critical to an individual’s productivity.  The second is that, as your job gets more complex and capable of high value addition, your dependence on the productivity and reliability of other people, systems and process around you, grows exponentially.  Indeed reliability of the service levels and collaborative effort of others becomes more important than their productivity per se.  To compensate for the unreliability of service levels from others, you are compelled to invest in redundancy in your own systems in order to maintain your service levels.

 

 

Lets assume that you need 3 critical services from your vendors to maintain your service levels at say 100%.  Assume these 3 vendors are reliable 80% of the time.  The probability that you will fail, given these three 80% inputs, is [1- (.8 x .8 x .8)] = 49%!  In short you will fail to deliver half the time.  How many of our services that you depend on are 80% reliable?  In turn, your vendor himself probably depends on similar three 80% reliable inputs from his vendors.  Factor that in and you can see how the unreliability and uncertainty builds up exponentially in complex systems.  Now think in terms of having two vendors for each input to take their reliability up collectively from 80% to 99%.  [The probability that both vendors will fail is 0.2 x 0.2 = .04.  So the collective reliability of the two vendors goes up to 1 – .04 = .996.]  By doing so you double your investment costs.   It is the investment cost of building redundancy into the system that cripples competiveness.  The slightest unreliability of sub-system can cripple a complex system because it builds up exponentially.

 

 

We are as good as the best anywhere in the world as individuals.  If you take an average manager, research worker, engineer or doctor and place her in the US, the performance and productivity is phenomenal.  But the same worker is probably less than average in the local ecosystem because the systems and process she depends on are riddled with uncertainty.  Since you can’t clone yourself to build redundancy, there is no way to increase your productivity beyond the upper limit imposed by the critical weak link in the system, whatever that may be.  That is our weakness as a nation.  We have not yet internalized the need for reliability in our schema to emerge as an industrial society.

 

 

You may recall Alvin Toffler who said that one of the main aims of a modern schooling system in the industrial age was to imbibe in the young the immense value of synchronicity.  The ability to be productive and competitive collectively requires a very different skill set than what comes with individual brilliance.  Moreover the organization & role-playing skills required are an order of magnitude more complex and difficult than personal skills.  Teaching them is neither easy nor cheap.  Nor are they easy to teach in a classroom.  Perhaps the best place to learn such skills and their value is in team sports.  Sadly, team sports, while critical to development of the young, remains the most neglected aspect of our school systems.  Most parents consider it a waste of time.  A society that doesn’t provide toilets for kids in schools can hardly be expected to triple or quadruple its investment to provide playing fields & equipment for team sports.  But learning to be an effective team player, the ability to envision your role in a larger system or process and to acquire the skills to collaborate and compete productively with colleagues can only be acquired on the playing field and not classroom lectures.  Moreover, these skills are habits, not knowledge.  They need to be internalized before they come into play and require emotional learning.  That takes a long time, which is only available in schools.

 

 

We need to move our focus from being individually brilliant to being collectively productive as a society while preserving personal freedoms.

 

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Should one defy a bully?

June 4, 2012 4 comments

Should one defy a bully?

 

How often we have been told through school days to keep our head down and concentrate on the main thing [studies] instead of taking “pungas” with bullies?  I think there is hardly any kid that goes through school not having had to face a bully at some point.  And for most of us, that one intense brush colors our outlook for life; and affects the way we approach power and authority figures later.

 

I have seen little literature that helps a child face bullying although there is much on how parents should manage bullying.  That is not to say that a child would be able to make use of such literature but still.  Considering the importance of the subject, there should be some that helps adults reexamine their childhood experiences and the impact those might have had in fashioning their responses in adult life.  Too often our general response to bullying in adult life is to shrink away from a confrontation in much the same way we did as children.

 

So should one defy a bully?  And if the decision is to defy, how and when should that be done?

 

A bully is someone who uses his size [or authority, power] to compel you to do something against your will even when custom, law or practice demands no such compliance with his or her wishes.  He may wish you to do something, refrain from doing something, or simply demand you pay obeisance to him as the recognized power/authority figure.

 

A bully by definition does not just bully you.  He also bullies many others like you.  He does so to add to his power and authority cheaply and without too much risk to himself in terms of injury or harm to his reputation as power/authority figure.  Bullying is a way to gain power, not just over you, but others as well, and to maintain such power over you and others.  The bully is usually much more interested in maintaining his power over the others he bullies [they are more in number and hence more important to him as a source of power] than he is in bullying you per se.  If you have grasped this rather counter-intuitive point, you are half way to winning the war against a bully even though you may lose the battle and have to nurse a bloody nose or put up with a black eye.  Consider.

 

The pay off matrix to an established bully is asymmetric.  If he successfully bullies you, he gains dominance over one more in his flock.  But if he loses, he runs the risk of similar revolts from his existing flock that is seething with repressed rage for such an opportunity.  And most of his existing flock knows that if the revolt is staged in two or three at a time, the bully backs off.  Bullying works only when it is staged one-on-one.   In all other situations, a bully has more to lose from a confrontation and little to gain.  His best bet then is to act very intimidating at the outset and execute his dominance in private.  Any prolonged public confrontation asymmetrically raises his risks of losing some of his existing flock.  That then is your key strength in fighting the bully.  He has more to lose in more ways than you do.

 

Once you have grasped the asymmetric pay off matrix, it is obvious that the bully will try to bully you only till his gain from bullying you is commensurate with the risk of losing face or igniting a revolt from his existing flock.  He cannot risk a prolonged confrontation as his risks multiply with time.  So in a fight with a bully you don’t have to win the first battle in order to win the war.  You just have to raise the cost of confrontation to the bully such that he is forced to think about his hold over his existing flock.  Forced to decide between maintaining power over others and bullying you into submission with additional investment of his limited time and energy, the bully will seek greener pastures elsewhere.  True, he will probably find another victim to bully but chances are he will leave you alone after the first confrontation.

 

The rest of the strategy then falls into place.  Don’t seek or concede a private fight.  A bully will seek privacy while he mauls you.  Never ever give him the opportunity.  Make the fight public.  Announce it to the world.  Put it in the public arena.  Give the bully no chance to hide either his act of bullying or to conceal the confrontation from others that he may be bullying.  If possible rally the others he bullies but this is usually not necessary.  You very act of defiance is usually enough to deter the bully if he has any brains and most bullies are sharp enough for that.

 

Time and numbers are in your favor.    The logic of the situation kicks in with your public act of confrontation.  Thereafter, it doesn’t matter if you win or lose.  A rational bully had few options but to back off from a prolonged confrontation.  Else his career as an effective bully is finished.  That’s a consequence of his asymmetric pay off matrix and has little to do with you.  But you have a lot more to gain than he does as time goes by.

 

So go ahead and defy.

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Pakistan army must transcend its narrow institutional interests

June 3, 2012 1 comment

ANALYSIS: Pakistan army must transcend its narrow institutional interests — Sonali Ranade

 

Pakistani generals have often precipitated the very outcome they seek to forestall by trying to punch far above their weight

The summit in Chicago did not go well. The almost daily drone strikes, the standoff over Dr Afridi, and the general noises emanating from both Washington and Islamabad make it clear that even a limited agreement over the situation in Afghanistan eluded both sides. Pakistan used its trump card of NATO logistics in an attempt to coerce the US into conceding its demands but found Washington unwilling to pay the asking price. When you play your trump card, and find it does not work, you have no option but to climb down to continue in the game. Chicago was an opportunity to manage that climbdown without loss of face or lasting damage to Pakistan’s ultimate goal.

Instead, petty petulance, unnecessary posturing and false prestige were allowed to derail a vitally needed agreement, even if limited in scope. Where does Pakistan go from here?
If you are a hammer, every problem is a nail. Every issue in Pakistan, rightly or wrongly, is a nail to the Pakistan army’s hammer. Pakistan is overly dependent on its army in formulating its top-level grand strategy, simply because it has no institutional capacity anywhere else in the system that can do the job. It is not surprising that the army as an institution looks at every problem through the prism of national security. That is as it should be. But nations have a higher purpose than just simplifying the job of defending themselves. They are also free to choose whom to be friends with and whom to annoy. Every choice they make is not simply embedded in their geopolitical location. The security-specific institutional focus of the army distorts the true nature of choices available to Pakistan, and since the army is the only functioning institution available, its view prevails by default.
General Kayani is on record as saying he considers India an existential threat to Pakistan. Therefore, he is unabashedly India-centric in his approach to Pakistan’s problems. Whether that is true or not, what is clear is that Pakistan’s strategy has centred on treating India as an existential threat. As a smaller neighbour, so goes the strategy, Pakistan must be aggressive in order to keep the slower moving Indian elephant on the defensive. The 1971 fiasco in Bangladesh, largely of Pakistan’s own making because of poisoned politics and unstated ethnic tensions, confirmed the Pakistani establishment in its belief that India is an existential threat. The question should have been revisited in the context of Pakistan’s acquisition of nuclear weapons and its growing security and trade relationship with China. However, such a review has never happened, at least not in the public domain.

Why would India wish to undo Pakistan? Leaving the lunatic fringe aside, nobody in India would wish to add 200 million radicalised Muslims to her burgeoning 1.1 billion population. The very idea is ridiculous. Given Pakistan’s nukes, the question of India acquiring military means to mount such an offensive against Pakistan is farfetched. India’s growing relations with the US, more hype than reality, is unlikely to change this geopolitical reality. However, there is no institutional mechanism within the Pakistani establishment that can challenge the established army security dogma and compel it to reexamine its assumptions in a realistic manner. That is the key challenge before policy makers in Pakistan.

Pakistan is an existential threat to itself. This is one aspect of the national security dilemma in Pakistan that is exercising some political and intellectual minds but has not been really articulated and debated. Perhaps a leaf or two out of India’s experience with taming its bureaucracy will help clarify matters.
As in the erstwhile USSR, so in the India of the 1970s and 1980s, the state’s capture by its politicians in tandem with the civil service was near absolute. Taxes on the rich had maxed at more than 100 percent. Meanwhile its middle class, spearheaded by the bureaucracy, captured just about every welfare programme initiated to help the poor. The rich got poorer, the poor got poorer, and the bureaucracy and the politicians lived in genteel poverty. As in Pakistan so in India, the civil service, seen as the most powerful organ of the state, attracted the best talent. Grooms from the civil service commanded the highest dowry. There were feeble efforts at reform under Rajiv Gandhi but the bureaucracy in tandem with socialist politicians easily scuttled them. It took a decade and a bankruptcy on the balance of payments front to bring the need for reforms to the fore and tame the civil service opposition to them.

The difference between the bureaucracy in India and Pakistan is not that much, except for two things. First, Pakistan’s reigning bureaucracy is uniformed and armed. That makes it very difficult to dislodge by force. Second, it is well beyond political control, having thrown off the bit through a series of coups. With no competing institution that can rival it in terms of prestige and public support, challenging the Pakistan army’s hegemony over all other institutions in the country will be exceedingly difficult.

Change can be both endogenous and exogenous. Endogenous change within a hierarchical, well trained, uniformed bureaucracy like the army is nearly impossible. By definition, groupthink dominates such institutions and those who do not conform are weeded out early in their careers. To expect that the army will reform merely by an internal reform is to indulge in a pipe dream. The exogenous route is the only one through which change can come about.
One of the unintended consequences of the army’s domination of Pakistani institutions is its preemption of resources to meet its requirements, both in terms of equipment, salaries and perks for its personnel. That process has gone too far, leaving little to throw at other crises facing the polity. These include multiple crises at multiple levels such as gas for cooking and power, electricity, water for agriculture, jobs for the young, education and training for workers and social services for the poor. Of these, any one, or a combination of them, could implode at any time in the next few years. The more Pakistan puts off dealing with these multiple crises by its preoccupation with geopolitics, the tougher it will get to resolve any one of these crises. Most nations that have come to grief in recent years have done so by internal failure rather than external aggression. In fact, if a nation is internally secure, economically and politically, the scope for external interference reduces correspondingly. Pakistan would have been compelled to face these issues of development much earlier but for the lease of life it received by way of military and developmental aid from the US in return for services rendered. That era may now be drawing to a close.

Pakistani generals have often precipitated the very outcome they seek to forestall by trying to punch far above their weight. Playing within your game, letting the opposition make mistakes to capitalise on, learning to wait patiently for an opportunity, are all elements of strategy that are alien to Pakistan’s aggressive style. Over and above all this, learning which game to play and which to decline, requires wisdom far beyond military strategy. Pakistan may be draining itself playing the wrong game. The Pakistani assumption that it is too big a nuclear power to fail, and therefore, the world can be persuaded to offer it a living, is both untried and untested. It is best left that way.
The writer is a trader. She can be reached at sonali.ranade@hotmail.com or @SonaliRanade on Twitter

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MARKET NOTES: It is a global synchronized downturn for the worse

June 3, 2012 2 comments

MARKET NOTES:  It is a global synchronized downturn for the worse.

 

 

Using Russel 2000 [^RUT] as the proxy for US equity markets, one may note that the index crossed below its 200 DMA on 16TH May when the moving average was 780.  After breaching the 200 DMA support, the index fell to its first significant support at 750 and rallied from thereon 21st May.  The rally tested the 200 DMA from below, observed it meticulously as a major overhead resistance and fell back.  Last Friday, after falling away from the 200 DMA, ^RUT breached the first major support at 750, [which had held last time] and closed at 737.42.

 

Two things fall out from the above analysis.  As the Russel 2000 represents a broader universe of stocks than the S&P 500, its decisive move below the 200 DMA signals a broad bear market for equities in the US markets.  Secondly, while the oscillators do not indicate an unduly oversold market, stocks have been declining since 26th March and are towards the fag end of an impulsive move down.  Considering the easy breach of 750, one could expect stocks to decline further to test the ^RUT 705 support level before consolidating for a period of time in the 705-750 range.  So while the markets are bearish, fresh selling from traders at this point is avoidable.  Look for opportunities to cover shorts and to reinstate them later at higher levels over the next few weeks.

 

All markets and asset classes are positively correlated now.  I think people seeking a place to hide will be disappointed.

 

 

Gold:  Gold surprised everybody this Friday, not by its rally, but by the extent and strength of the rally.  In the normal course, a pullback to $1600 was on the cards before another attempt at breaching $1520 floor.  Most traders would have put in trading stops at $1620 or $1625.  Gold closed the Friday at $1625.64 after making a high of $1629.41.  That’s a clear warning to small traders to clear out of the market and let the big boys fight it our between themselves.

 

On the other hand, note that Gold did not seriously breach its overhead resistance at $1625 on a closing basis.  Further, in terms of my wave counts, while we are the fag end of the fall from $1920, in terms of time, there is at least a month before a substantial pullback in gold falls due.  Lastly, the daily oscillators are flashing gold is over-bought at this point.

 

The spike in gold coincided with spikes in the DXY, EURUSD, Silver markets and looked more like a device to shakeout weak bears than a serious attempt at a rally.  There would have to considerable base building in gold at around $1500 or lower before gold can show a sustainable rally.

 

I would rather wait to see gold fall back and confirm a reversal in price trends rather than treat the spike in price as something serious.  Not bullish in gold still.

 

 

WTI Crude:  Must confess; have stayed out of the market all thru the fall in Crude, February onwards.  Will wait till market reverses from $75 before reentering the market.  But for those in the market, here is my read on the charts that till now left me confused.

 

To my mind, the fall in crude prices is a correction for the rise in crude from $32.64 in January 2009 to $114.18 in April 2011.  If so, that makes for a textbook bullish “cup & handle” correction. The target for the last leg of the correction is $75.5 followed by a deeper floor at $70.

 

Indian readers, and the few in RBI who read this, may note two things about this correction.  Firstly, the fall in prices is a “bullish correction” to previous rallies.  The uptrend in pries will resume quite sharply once the correction is over.  Secondly, the time cycle analysis indicates that the correction will not last; repeat NOT LAST, beyond the end of September 2012.  So please don’t bank on the fall in crude prices.  Instead grab this opportunity to reform the oil sector.  You won’t get another chance once the big WAVE III comes into play.  The recovery in prices after a WAVE II correction is sharp, swift and leaves you gasping to understand what happened.  You have been warned.

 

 

Silver:  Silver chart illustrates why I find the spike in gold price spurious.  Silver has followed gold pretty closely since it made a low of 26.73 on 16th May 2012.  The spike in Silver on Friday did not stretch into its 25 DMA which sort of caps short-term rallies in the metal.  In terms of wave counts, I think Silver has still some time to go before it completes its wave 3 and that should be followed by a wave 5 as well.  Hence the floor $27 can be expected to give way some time over the next few weeks.  Not bullish on Silver.

 

 

$-Index [DXY]:  DXY made a high of 83.67 on Friday before closing at 82.9730.  I had anticipated a pop to 84 in the blog. The day could also count as a key reversal day indicating a halt in the price trend for some time.  In any case, the $ needs to consolidate here for a week or so before resuming or setting a new trend.  Such consolidation will have a first floor at 82.5 followed by deeper floor at 82.  A breach of 82 will signal a significant trend reversal.  Not bearish on the $ save for the anticipated correction.

 

 

$-INR:  I had anticipated a range extension for the $ from 54.5 to 57.5 with first stop at 56.5.  The $ made a new high of 56.34 during the week, signaling we may still see 57.5 over the next few weeks.  For the moment, the $ is likely to first test its new floor at 54.3 to make sure of the bottom of its new trading range.  One can expect range bound trading within the band of 54.5 to 57.5 for perhaps a month or two before rising crude prices trigger another round of weakness.  Government may be underestimating what markets have in store for India.

 

 

EURUSD:  The Euro$ [EURUSD] closed at 1.2432 after making a low of 1.2286 and a high of 1.2432, all in the same trading day.  In my view, the spike is without much technical significance except as a part of some coordinated move by professionals to shake off the crowd of day traders who entered the market late.  The spike would have wiped them out but has little to do with long-term trends in the Euro.

 

The Euro breached its long held strong floor at 1.26 on 23rd May and decisively confirmed the breach two days later.  Since then it has been in a free fall and, considering the velocity of the fall, the spike on Friday was not really trend altering in any way.  EURUSD first target now lies at 1.2150 followed a deeper, far more significant floor at 1.18.  The downtrend could resume next week itself after a day or two of consolidation.

 

The time element in the EURUSD charts is unclear.  On one reckoning, the Euro could ends its fall at 1.18 or thereabouts and turn up from there.  A more bearish view would send it all the way to parity with the Dollar over a longer time frame.  Which of the two ways the cookie crumbles will be known only by the EURUSD price action around the 1.18 to 1.20 region.  Needless to say, continue to be bearish on the Euro.

 

 

Sensex:  The Sensex rallied briefly to its 25 DMA at 16,440 before turning down.  It closed the week at 15,965.16.  The index is getting ready to test the previous bottom at 15,126 during the ensuing week or the next.  The bottom at 15,126 may not be breached at first attempt and the index could bounce from there.  But the time element indicates the test of 15,126 will not be over after the first attempt.  I would be surprised if the support did not give way.  Price action around 15,100 will provide some clues to the ultimate target on the Sensex.

 

Would I recommend accumulation at this stage?  The answer is no.  The cats & dogs that most retail investors buy as “investment” may be near their lows if you take their previous highs into account.  But the question is would you be prepared to hold such dogs on a further 50% decline amidst all the doom & gloom?  Most investors dump them on further declines.  Second, the blue chips that you should buy as prudent investor usually fall towards the fag end of the down turn.  That’s what takes the index down finally.  That may not have happened as yet.  So my advice would be to do your homework.  Target a select list of 15 blue chips; see their charts for previous lows.  Make a reasonable assumption of where you expect them in a crash and buy them when you see those prices.  Buy and hold.  Unless you are professional trader, that’s the best way to beat the market.  Buy the utter doom and gloom but only in blue chips tested by time.

 

 

S&P 500 [SPX]:  SPX has broken an important floor at 1290 to close the last week at 1278.04.  For general commentary on US stocks please see the write-up on ^RUT above.  This is specific to SPX.  In my view the index is likely to test 1260 next week before consolidating a bit and continuing towards 1100.  Indeed 1260 may not hold for long.  Note, SPX has decisively fallen away from its 200 DMA area and that means long-term sellers will be eager to get out of the market.  Second, the NYSE signaled a “death cross” during the week as I had predicted last week.  NYSE Composite comprises all the stocks listed on the NYSE.  So when it signals a death cross, other narrower indices should follow sooner or later.  ^RUT is very close to death cross which could be triggered next week.  SPX and DJIA could take a week or two more, but the direction should be clear.

 

 

One other point may be noted. All risk assets are correlated positively.  There are no exceptions – not even gold or crude, Iran or no Iran.

 

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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