Red Alert: Five Charts and their implications

 Commodities, Indian Market/Stocks  Comments Off on Red Alert: Five Charts and their implications
Nov 292010

A couple of  weeks back I had posted a note on my own derived indicator and highlighted how important it was for the indicator to hold above the previous trough. On Friday, this indicator dipped below the previous trough on a closing basis and has warned that the Indian markets have probably peaked and a bearish phase is a very distinct possibility. So naturally one has to ask - how has this indicator fared in the past?

Indian economy barometer

This indicator has a commendable track record over the last 10-12 years:

1) In 1999 - the indicator peaked in Oct 1999, and warned of a bear market a few weeks before Sensex and Nifty peaked.

2) Likewise in 2003 when the Sensex/Nifty bottomed in April, this indicator was a few months ahead signalling an impending new bull market (some might consider Oct 01 as the bottom for the Indices, even then this indicator was ahead)

3) In 2006, during the infamous sharp drop in May this indicator stood its ground.

4) In Oct/Nov 2007, this indicator warned of an oncoming bear market.  The Indian markets peaked in Jan 2008.

It is often a good idea to look at other inter-related markets before coming to a conclusion about a major trend-shift. And here is where the fixed income /bonds come into the picture. Here is a chart of the 10 year OIS swaps.

10 Year Swaps - Daily Charts

As is evident from the chart, there is still an intense struggle to cross the 200 DMA. AND when stock markets were trading near the all time high, the 10yr swaps were actually miles away from the peak made in February!  If stocks are that attractive why are investors still seeking the safety of fixed income?

I have for quite some time held that the continuation of this bull market is largely dependant on the debasement of the USD. Which was exactly why I had stressed the importance of staying  near the door of the bullish camp and having price objectives as opposed to a price target (see CNBC interview) on emerging markets, Gold, Silver and other asset classes. That brings us to the chart of the Dollar Index:

Dollar Index - Ichimoku charts

Not only has the Dollar Index reclaimed the key level of 80, it has also punched through the cloud resistance on its daily charts. If  my reading of the wave count here is correct, what we saw between QE2 day and Nov26th was just a milder part of the Dollar Index rally. The stronger portion of the rally has just about begun! ! (Remember the tight inverse correlation between emerging markets/commodities here and here?)

In 2010, emerging markets have had 2 significant corrections prior to November. One in Jan-Feb and the other one in Apr-May. The gross short interest in MSCI EM was 15% lower at November peak when compared with the January peak. That is a substantial level of complacency!!

MSCI EM Gross short interest

Let us also look at Gold which can give us a fair idea of inflationary/deflationary pressures in the global economy.

Gold Daily Charts - A potential H&S top?

The daily charts of Gold shows us that the swing to 1425 is in disagreement with the momentum readings. We can also see the potential for a Head and Shoulder top formation.  A close below the neckline, currently at 1340, is likely to augment further selling and a minimum drop to 1225 level is the expected outcome of such a breach.

From out-performance to under-performance

 Indian Market/Stocks  Comments Off on From out-performance to under-performance
Nov 262010

Nifty is now the second worst performer amongst its Asian peers (taking USD into account) only behind the Philippines Index. In absolute terms, at the third place behind Philippines and China. Although on a quarterly/half yearly and Annually the Indian Indices are scoring handsome gains, what a swift reversal in performance! Anybody there who does not believe in Momentum?

Nov 242010

The boundaries of yesterday's low and high marked an important level in many global markets. On Sensex/Nifty yesterday's low is of significance. It was not just a 'hammer' pattern - the low also came of an important trendline.

Nifty - Daily Charts

The trendline is more perfect if drawn on the Sensex, we can connect the lows of March 2009  through these significant lows. A close below yesterday's low can make things turn nasty and that makes yesterday's low a must hold.

Axis Bank – a trend reversal?

 Indian Market/Stocks  Comments Off on Axis Bank – a trend reversal?
Nov 222010

For the first time in since March 09, Axis Bank has clocked a lower high, lower low pattern. This is shown in the chart below.

Axis Bank - Daily Charts

Also visible on the charts, is the break of an important trendline and 100 day exponential MA. The green circles on the chart highlights how these levels acted as supports during prior declines.  A breach of these levels along with a lower low, lower high pattern is a clear warning signal that the risk has grown for those holding longs. Ideally, I will look to enter short positions on a small rise.

A similar breach is visible on BPCL (no trendlines though).

Correction or trend reversal?

 Uncategorized  Comments Off on Correction or trend reversal?
Nov 152010

In June, I had posted a note on this indicator and wanted us all to keep an eye on it. However, the indicator averted a double top risk and stayed above the previous trough during the May-June correction. Once again its time to keep an eye here. If this indicator dips below the orange line, it would be first warning sign that the existing uptrend is starting to turn weak. Although the possibility of a trend reversal exits only below the red line. I will post an update on this indicator if the indicator dips below either of these two levels.

Indian economy barometer

However, this time around there are couple of things that are loaded in favour of the bearish camp. One, Reliance is an under performer unlike the previous time. Two, SBI, a key leader in this rally, has also started to show pronounced weakness. Thirdly, there is a pronounced negative divergence on Nifty/Sensex daily charts.

What's favouring the bulls? The longer term momentum has matched with the price peaks and one possible wave count points to another leg up (need not result in a  high though).

Nov 142010

The reddish metal which usually acts as a leading indicator for the equity markets, threw in a late endorsement of the recent down move.

LME Copper - Daily Charts

The sell off on Friday reiterated the "shooting star" candlestick signal of the previous trading session. Already, the momentum peaks were not in agreement with the recent swing high. Expect a test of short term support at 8155(LME Copper).

 Posted by at 11:44 pm  Tagged with:

Dollar Index – Either a bottom is around the corner or a bottom is in place

 US Markets  Comments Off on Dollar Index – Either a bottom is around the corner or a bottom is in place
Nov 092010

Dollar Index - Daily Charts

The daily charts of Dollar Index shown above, the drop from October lows to November lows is not matched by a momentum drop. This kind of positive divergence is usually a precursor to a trend change.

Powershares DB US Dollar Index Bullish Fund

The UUP charts shown above, a morning star candlestick pattern is visible.  When this pattern occurs it is usually a strong reversal sign.

Also, I can count 5 wave decline to the November lows and Sentiment readings from Trade-Futures are pointing to a very extreme level of bearishness for the dollar index (hence bullish from a contrarian  perspective).

So what does all this mean for the other markets? Commodities and stocks closely tied to commodities are very likely to be the immediate victims. The daily correlation for equity markets with the Dollar Index, though varies now and then, currently stands at a range of -ve 0.83(for S&P)to -ve 0.94(for NSE Nifty) i.e. a very high inverse correlation. It is pertinent to note here that such a high inverse correlation existed for equity markets in November 2009 and when the Dollar Index started a powerful rally in December, a correction in equity markets commenced not until January. So a correction or a trend change in equity markets may either be immediate or may start with a slight lag depending on the strength of the anticipated USD rally. Stay cautious and watch how the markets pan out over the next few days.

Bajaj Holdings breaks out

 Indian Market/Stocks  Comments Off on Bajaj Holdings breaks out
Nov 022010

Bajaj Holdings - Daily Chart

If I were to go long here, I would place my stop below 800 at close and I would let my profit run. I do think 1200 should be an easy objective for this move.