Jai

Let the game of competitive currency debasement begin

Sep 272010

Last week, the Dollar Index breached an important support, the 80-79.5 region (highlighted), negating one possible wave count for a stronger and higher USD.

Dollar Index Daily Chart

The markets seem to suggest that Ben Bernanke was not just merely using empty rhetoric when he said deflation will not be allowed to occur. The reserve currency is getting debased. We already saw some intervention on the Yen from BOJ and we should expect more such actions from other monetary authorities around the world. One can also see Gold hitting new highs across almost all the currencies indicating potential or real drop in their values.

While in the past the US Fed has managed to prop the markets up by such debasement, my sense this time around is that it will work initially before stocks and the US Dollar sink in lock-step. As can be seen from the above charts, the Dollar Index gets support around 76.5- 74.2 and the all-time low of 71. I will be surprised if the world does not slip into a currency crisis below 71 Dollar Index. Until that happens, enjoy and embrace the ride in the stock markets around the world while being prepared for the future.

Yet another fakeout?

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Sep 242010

Yesterday's drop in the S&P 500 below the breakout level of 1129 is once again looking like a failed breakout. As highlighted in my September 2nd post there have been 3 fake out's since June already.

S&P 500 Daily Chart

And each of these fake out's have resulted in a 6-8% move in the opposite direction. As highlighted in the inverse head and shoulder post, the volumes were already looking suspect and this drop back into previous range will give some powder for the bears. Near term supports at 1105 and 1090 must hold else the risk of yet another swing to 1040/1010 are on the cards.

Wall Street Sequel: Which way for the markets?

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Sep 232010

Wall street: Money Never Sleeps is getting released in the US today. This is the third movie titled wall street. The first feature film was released in Dec 1929 and the second one ( Chart-buster starring Charlie Sheen and Michael Douglas) was released in Dec 1987. Strangely, markets saw a big crash in 1929 as well as in 1987. In 1929, after the October crash, markets rallied in a counter-trend for a few month before embarking on the biggest decline in the history of the US markets. However in 1987, the crash of October 1987 marked a major low for the US markets and US markets rallied from there on.

Interestingly, there was a mini crash in May 2010 and there is still a bit of mystery surrounding this crash. So will the 3rd wall street feature film mean anything for the US markets? Will it be like 1987 0r 1929? While this need not be an indicator of anything but nevertheless will be an interesting theme to watch out for.

Inverse Head & Shoulder breakout

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Sep 212010

The S&P busted through the resistance level at 1131 and in the process completed the inverse head and shoulder pattern. While conventional measuring techniques provide a price objective of 1250, it is another topic if the S&P can take out the April high of 1220 and would go all the way to reach this price objective. I will try to do a post on this later after some more research.

S&P 500 - Inverse H&S breakout

In my Sept 2nd post, I did alert to the inverse head and shoulder breakout as one of the possible scenario and we also took note of several false breakouts in the same post. Given that all through July-September the S&P has been rallying on low volume, we should be watchful if the market repeats this choppiness one more time. I'm not saying it will but a good trader is one who is prepared for all scenarios.

Indian Markets – Complacency running high

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Sep 082010

The readings on NSE India VIX are approaching extreme levels. Although they haven't yet reached the most extreme readings since its inception but it is at its lowest readings on a closing basis. The current level of complacency is much more than it was during the January 2010 highs.

India VIX - Daily Charts

As can be seen from the chart above such low readings have often corresponded to significant peaks of April highs, July/Aug 08 highs and May 08 highs. Had it not been for the limited history of India VIX, I will be sitting with a bucket load of puts. But being a conservative trader, I prefer to act on things with much longer history. If aggression is your cup of tea here is a chance to pre-empt the market. Nevertheless, this is a chart that might be worth every trader's attention.

US Markets – Is the down trend under risk?

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Sep 022010

As a trader it's very important that one remains open minded in the market to see the patterns and trends that are evolving. With the S&P surging to one of it's sharpest gains in the last 2 month's, I did try to take a view on markets like someone starting today on a clean slate.

As can be seen from the chart below - there are 2 competing patterns that are trying to overrun each other's lines of defence, namely the bearish head and shoulder pattern(red) and the bullish (potential) inverse head and shoulder pattern (IHS - blue). What is also obvious is that there have been 3 breakouts (circled in orange) that have not seen a follow through.

S&P 500 Daily Charts

In order to anticipate how this stalemate is likely to resolve, lets try to look at the longer term market structure using Elliott wave analysis.

S&P weekly charts - EW Count

It can be seen that the S&P is still progressing in its fifth wave and is essentially in a down trend. So one should expect this rally to fail somewhere along the way. Even if the S&P does manage to break out of the IHS neckline at 1131, the probability of it failing under 1220 looks remarkably high. The reason being that the price and time have squared at 1220 high in April and (unless my calculations are wrong ) 1220 is likely to be a multi-year high. Also, a retest of the high of at 1220 would once again be within the template of 1937-38 bear market structure (see April 28th post).

So, I see this as a short term trading opportunity on the long side though I still do not find any overwhelming reasons to be bullish over the medium- long term. Also, my cycle analysis is pointing to a cycle high on the 6th of September (with 1 day tolerance) and I will be watchful to see if the market is coming under pressure under the obvious resistance levels of 1094-1100 and 1131.

PS: I have looked at the US markets in isolation using the S&P. The SOX is well below its July lows and Russell 2000 has retested its July lows - these under performances are usually good leading indicators.

Focus shifts to INR

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Sep 012010

As mentioned in my August 27th post, the Indian Rupee has hit the upper borders of the trendline and looking at today's SGX Nifty at pre-open and early currency market moves, it may be moving along expected path. This is shown in the chart below:

USDINR Daily Chart

So if USDINR charts this path, the stock markets should take an inverse path - that either stalls under highs of August or makes a high slightly above 5600 and pulls lower sharply when INR breaks out of the symmetrical triangle. The chart below shows this scenario on Nifty.

Nifty Daily Charts

Is the Auto sector topping out?

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Aug 302010

I did mention in my friday's update that a close below 5452 would be a bearish signal for the Indian market. Besides an engulfing bearish candle pattern on the Nifty, one other key index in this bull run, the auto index has also formed a bearish engulfing candle on its price chart.

BSE Auto Index - weekly chart

In March 09 when the broad markets were trying to form a bottom, this sector was already on its first leg of the rally. As can be seen from the chart above, besides the candle pattern, the advance looks like a completed 5 wave advance indicating a possible exhaustion.

Looking at the chart of Tata Motors gives a similar picture. Further negatives likely for Tata Motors if the stock starts trading below the previous week's low of 983.

Tata Motors - weekly chart

Channel lines puts pressure on Nifty

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Aug 272010

First post from Singapore - settling down here took a bit longer than anticipated. OK, back to markets 🙂

As can be seen from the chart below, the channel lines are putting pressure on the Nifty.

Nifty Daily Chart

Also, momentum peaks continues to disagree with the new price highs.

In my March 8th post, I had projected that Nifty should reach a minimum target in the region of 5600 but we dropped that stance in April expecting a correlated breakdown along with US markets. After initially declining to 4800 on the Nifty, Indian markets showed great resilience and outperformed almost every market in the world. So what has this got to do in the current context? The current high of Nifty satisfies the minimum level required for wave 5 completion (approx equals wave 1). Also, if Nifty closes below 5452 today (farther from this the stronger the signal ), a moderately negative to highly negative candle will be formed on the weekly charts.

Looking at the USDINR crosses, a symmetrical triangle seems to be in play and the upper borders of this triangle shares a common boundary with a medium term trendline. A convincing move above this level will mean more weakness for the Indian currency and as a corollary further weakness for the stock markets.

USDINR Daily Chart

My guess is that the Rupee will hit the upper borders today and pull back into somewhere into middle of the triangle to lower borders of the triangle, gather steam and then push past the 47.15 breakout level. If this scenario pans out - there might another push towards the high for the Nifty after the current decline. Let us see how the market pans out.

We were more focussed about going to cash and buying OTM puts as protection rather than going short between April and July. Considering that September is historically one of the weakest months, we will consider being short in a small way and try to build on them if situation warrants.

Its not so peachy yet for Nifty

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Jul 152010

Here is a chart of Indian Nifty in Dollar adjusted value.

Nifty daily chart - Dollar adjusted value

As is obvious from the above chart, Nifty has not even crossed the June highs, leave alone the April highs. And this could be the completion of a right shoulder in a head and shoulder top. While Nifty could very well continue to push higher and cross the highs of April in dollar terms- but other technical evidences at the moment do not favour that scenario. I guess by the time I post my next update from Singapore, markets should have more evidence of which way they are headed.

Good trading to all!

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