Hi everyone, I've been erratic with my posts and that will continue to be the case all through July. I'm relocating out of UK and my time and energy is focused on the relocation. Hopefully, by 1st of August Ill be all set in Singapore and updates on this blog should get regular.
Will keep updates coming as and when time permits until then.
Good trading to you all.
For the first time since 2009 cracks have started to appear amongst India's banking stocks. ICICI bank is showing considerable weakness and a close below 815 may weigh heavily on the banking index. HDFC bank is showing potential for a double top - of course this is not fatalistic but a close above 2025 will neutralise the negatives. A prudent investor/trader must watch the Bankex Index for clues to how the Indian markets are going to resolve.
BSE Bankex Line chart - Source Bloomberg
A close below 10100 for the Bankex would be a warning sign for further weakness in Banks and as a consequence for the broader indices - Nifty and Sensex.
The Grand Daddy of technical analysis, the Dow Theory, indicated that the US markets have slipped into a primary down trend - in other words known as a bear market. The Dow Industrials closed below its May trough of 9810, a day after the Dow Transportation Index closed below its May trough of 4034. I'm not even going to bother with the charts as I'm sure the internet is filled with this news.
In this process, US markets have also completed the H&S pattern we highlighted in our June 15th post https://www.cashthechaos.com/blog/?p=261
In the extreme short-term, US markets could be in for a bounce as the Nasdaq has had 8 consecutive down days and the Dow and S&P 7 down days in 8. While such a bounce is not a guarantee, if it occurs, it would be an opportunity to get short and get out of longs positions if any.
Indian markets which have shown tremendous resilience and outperformed world markets so far, may not do so for long. Expect more intense selling pressure next time Nifty trades below 5259.
After a bout of choppy trading in the last 2 weeks, the USDINR pair closed above its 200 DMA. The point to take note here is that the pair crossed this level after registering a island reversal and is a pointer to further strength for the dollar against the rupee in the coming days.
USDINR Daily Chart - Source Bloomberg
Yesterday's close above 5200 on the Nifty does bring in some positives for the index but the bears may not have surrendered their last line of defence.
Nifty - Daily Chart
As can be seen from the above chart, the correction from the April highs to 4786 has happened in a 5 swing fashion - usually an indication that it is part of a larger correction. Also, potential for a head & shoulder top exists for the Nifty if it does not push through the resistance zone (shown shaded on chart).
Hence the bears may have dropped the advantage they had since April but their last line of defence may still be in place.
The potential for a head & shoulder reversal can also be seen on S&P 500.
S&P 500 Daily Chart - Data and Chart courtesy Bloomberg
So until further clarity surfaces, one may either sit on their hands or may stay hedged on their short and long trades.
The Dow Transports and the small cap Russell 2000 closed below their respective 200 DMA. These were the 2 important indices that held above this much tracked level all through the Month of May and this could mark another significant breakdown in the US markets.
Dow Transportation - Daily Chart
Russell 2000 - Daily Chart
As long as the Transportation index was holding above its 200 DMA the chances of recovery remained. Now with this move, those chances have gone up in smoke.
The small cap russell is a good measure of risk preference of investors. Once again, with a close below 200 DMA, the risk taking appetite has probably been flushed down the drain.
While Indian markets have been the best performer during the current decline amongst the BRIC countries - this may very well become the reason for a more pronounced sell off, as short sellers start targeting the out-performers.
For those interested, here is what I had said on CNBC this morning:
So far the Indian markets decline has stayed within the bounds of a correction and much similar to the previous two corrections - roughly a 12% drop from the highs.
Nifty Daily chart - Source Bloomberg
However this time around, there are a few variations. There has been considerable technical damage in many of the world indices and some have even topped out.
More importantly, one of my derived indicators that I use to measure the health of the indian markets, came very close to throwing a market top signal. And this will be the indicator I will be keeping an eye on for the next few days to a few weeks.
Indian Economy barometer - data and charts bloomberg
This indicator has a stellar track record - it either leads or is coincident with the market topping out process. Obviously, I will not reveal what or how this indicator is derived 🙂
In our April 28th Global Technicals, we had highlighted the potential for a double top in high yield corporate bonds. In yesterday's price action, the double top potential was realised as the ETF plunged through its previous trough low.
High yield corporate Bond fund (HYG) - Data and Chart from Bloomberg
This breakout signals that a collapse in the junk bonds is in the horizon. In other words the problems are mounting for the neediest borrowers and they are going to find it extremely hard to find willing lenders. While this clearly means risk aversion, there are other questions that are popping up. Could this mean there could be an increase in commercial delinquency? Or A double dip recession? Well, one has to wait and watch.
Today's price action in the Indian currency has put a question mark on the bullish price objective of 41.5-42.0 that we have been maintaining since last year. In today's trading, the USDINR closed above an intermediate term trend-line (see chart) that had kept the rupee's strength going.
Rupee weekly chart - Source Bloomberg
Looking at the Ichimoku charts, the currency has overcome the "cloud" resistance on its daily charts. Also, a span twist is visible (green circle) which is another bullish sign for the USDINR (bearish for the rupee). All these price actions have transpired on the day when the Indian Nifty has closed below its 200 DMA for the first time since April 2009 - a sign that FII's may be heading for the door. Considering the above technical evidence, we expect Rupee to test the support of 47.6-47.8 in the short to medium term.
INR Daily Chart - Source Bloomberg
The longer term Elliot Wave count for the INR seems to suggest that what we saw from 52.18-44.05 may have been just a wave 4 and the current move could be the start of a wave 5 that could go on to test the level of 52. Although this is too early, we will keep this at the back of our minds.
"Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." - Warren Buffett
Here is the Gold's performance compared to Berkshire Hathway's performance over the last 10 years. Data and Chart courtesy Bloomberg.
Gold has outperformed Berkshire by a whopping 277% over the decade, 135% over the last 5 years and 10% over the last year. So clearly value is not a function of utility. Blame it on the world of competitive devaluation of currencies!!