If the dollar continues to rally as expected, commodities will continue to tank after a short counter-trend rally.The same holds true for precious metals, says Sonali Ranade
The week saw markets test asset prices in a rising interest rate environment as yields on 10-year US Notes flared up from 220 bps to 265 bps.
Bond markets saw huge selloffs as expected but then the storm held its peace. You can sell your bonds but where do you take your money? The hyped up-refuge from currencies, precious metals, just tanked, with gold price falling an unprecedented 24 per cent in just one month. You cannot sell bonds and walk away. There is no place to hide except in risky assets. You just have to pick the right one at the right time and equities maybe the least dangerous option, next only to bonds! So the markets held up to ponder the conundrum!
As discussed in detail below, the technical damage to indices was limited. It shows a weakening rally that is ripe for correction, possibly after this leg of the rally. So I am not changing my wave counts that suggest a mid-August denouement. On theother hand, a tradable rally from current levels is on the cards.
The US dollar appears unstoppable. Not surprising given the relative strength of the US economy vis-à-vis the floundering in Europe and the deceleration in China. If the dollar continues to rally as expected, commodities will continue to tank after a short counter-trend rally.The same holds true for precious metals.
China presents a clear buying opportunity for traders and investors while the Nifty has some potential for upside in India. Long-term investors should be looking at both for accumulation. Of the two, China is a surer bet till India gets through its general election. The dollar may seek higher levels against the INR in line with other currencies. That may deter foreign investors in India for a while though. I am upping my target for the $ to INR63.50 to 65 range by the end of 2013.
Gold: Feel a certain pity for gold bugs, especially those who were looking to the metal as a hedge against hyperinflation. Gold salesmen proved no better than those peddling dud stocks to gullible investors. Gold closed the week at $1223.70, having made a new low of $1179.40 during the week. First support for the metal now lies at $1150. While gold now looks “cheap”, there is nothing on the charts to show it has bottomed out. There is room for further fall both in terms of wave counts and time. A pullback to 1260/1280 is however not ruled out before we have a bottom.
Silver: Silver closed the week at $19.47 after making a new low of $18.17 during the week. Like in the case of gold, there is no evidence that the worst is over. Having decisively violated the $20 support, the next support for silver now lies at $14 -- a fact I have been repeating for months. More sorrow in store for silver bulls.
HG Copper: As expected copper dropped down to retest the 3.0 support and the good news is that it has held up so far. Copper is close to a bottom in terms of wave counts and time if not at one. Should 3.0 hold up over the next week, we could see a decent rally in copper towards the 3.50 mark. Time to close all shorts in copper. A counter-trend rally is in the offing.
WTI Crude: WTI crude continued to defy the general commodity trend downward. I have been expecting crude to drop down to the $84 region in line with other commodities, but it appears to be marching to a different tune. What can be said is that the move to $84 has failed. In retrospect, the fall to $85.61 on April 18 completed the down move and crude appears to be trending up again in a complex counter-trend rally. With this in mind, the rally from $ 85.61 to the top of $99 on June 19 represents a bullish advance and crude has started a conventional correction for it from the top of $99. Having found support at $92, its 200 DMA,,crude can pull back to $99 before repeating the downdraft to $90 levels. The downside and upside to crude appears pretty limited for now.
Yield on 10 year USTs: I have been expecting a move beyond 230 bps for the yield on 10-year treasury notes for weeks. When the move did come, it surprised to the upside with yields flaring up to 265 basis points, roiling bond and equity markets. The yields have sobered up after making a high of 265. An orderly pullback to support at 230 bps is now on the cards. But the up-move is far from over and we will see new highs on yields after a short consolidation.
US Dollar [DXY]: US dollar, and the short-term interest on it, is emerging as the key driver of markets going forward. Dollar is now one of the few currencies in the world that might offer a positive real rate of return to investors worldwide that is backed up by real though modest GDP growth. After the shock of higher yields wears off, the real returns to holders of Treasury Notes in terms of interest + currency moves may just entice overseas buyers. So expect the dollar to be driving things for a while.
That said, back to technicals. The US dollar is in a sustained bull move from the bottom at 73 made in May 2011. The top for this bull move may be in the region of 89. Having made a high of 84.595 on May 23, DXY corrected down to support at 81and is now all set for the previous top. There will be consolidations on the way. But my sense is that we will see a new high over the next few weeks. First major overhead resistance now lies at the previous top followed by 85.50. I expect DXY to be 89 by the end of October this year.
My brief foray into the“fundamentals” of DXY is more by way of sketching out the context in which the complex moves in asset markets can be viewed. My view of 89 for DXY by October this year is a purely technical read.
EURUSD: The euro has moved down from 1.34 levels and appears headed for 1.27 eventually. It closed the week at 1.3080, well below both its 50 and 200 DMAs. Expect a bout of consolidation below 1.31 before the euro takes out the support at 1.29. EurUsd is caught between two diametrically opposite trends and may therefore show violent movements both ways. For now, the trip to 1.27 is very much on the cards. First support at 1.29 followed by another at 1.28.
USDJPY: A lot of people believe it is UsdJpy that’s been driving markets of late. Abenomics is a factor but not the major one. It is the tectonic shift in dollar interest rates that are causing the upheavals worldwide. UsdJpy is a sideshow. Having found support at 94, the dollar is now headed back up to the previous top of 103. Expect consolidation on the way. I suspect we will see the traditional cup and handle traced out after the dollar gets back up to 103 or thereabouts.
USDINR: Contrary to most forex pundits in India, I have not only been bearish on the rupee but also bullish on the dollar in the INR market in line with my long-term bullish projection for DXY at 89 by October-end. The dollar made a high of INR 60.76 this week, pretty much in line with expectations of a new high. A modest orderly pullback to support at 57 and possibly 55 would be healthy to work off the excesses. However, newer highs on the UsdInr pair are in the offing as DXY makes new highs in world markets. The UsdInr is now in uncharted territory and there are no benchmarks to estimate value. My sense is that INR 60 corresponds to DXY84.50. A move to 89/90 region implies that UsdInr should head towards 63.20 to 65 region in line with DXY by end October. This would need to be confirmed on charts by price action.
DAX: DAX found support at its 200 DMA currently positioned at 7700 from its fall from the top. Subsequently it rallied to 8015, a significant overhead resistance and may pull in from there back to 7700 to retest the 200 DMA support.
While DAX has often found ultimate support at the 200 DMA to move on all through this rally, the correction from the top of 8500 reveals a significantly weakening of the technical picture. For one, the support at 7950 failed to hold. Secondly the fall spanned by the correction [A-B-C so far] approx. 900 points from the top exceeded the net gain from the previous up-move. The weakening isn’t sufficient to trip DAX into a bear move but warns of a reversal ahead. Will this rally from 7700 result in a new high? That is impossible to say in view of the technical weakness. But it is possible. For the moment, holding my view that we are headed into possible new high by Mid-August before a reversal.
NIKKEI 225: Nikkei has been in a counter-trend rally after having made an intermediate bottom at 12435. It closed the week 13.677.32 just under its 50 DMA currently positioned at 13,300. Nikkei is likely to make for its previous top at 16000 though it may not make a new high this year. My sense is that Nikkei will play to a fairly typical wave II correction and come back to retest 12400 by the end of this year. That leaves sufficient room for a rally to 16000 by mid-August in the works.
Shanghai: Shanghai came down to test 1950 as expected and sliced through the support to make a new low of 1849.65. My sense is that we have seen the low on Shanghai for now and are now headed back to the 2450 or higher. The rally that ensues is more a counter-trend rally but will have the look and feel of a regular bull wave. However, a quick retest of 1850 early next week is possible. China is a good buying opportunity at these levels.
Russell 2000 [RUT]: RUT is important at this point in the markets for what did not happen rather than what happened. In the current fall from the top of 1008.23, Russell’s support at 954 was nicked for a day by small margin on closing basis but essentially held in tact. RUT represents the weaker mid-cap space in the US universe of stocks. For them to demonstrate such strength at a time when equity values were taking a beating worldwide is rather significant. It means retail interest in equities is no mood to sell as yet. Bears would be pretty foolish to press their case against retail sentiment. So RUT really tips the odds in favour of a new high for US equities. RUT could come back to retest its 50 DMA early next week, though..
NASDAQ 100: Nasdaq 100 punctured its first support at 2860 during the current correction by a small margin by closing at 1848. Essentially first support held up well and on clearing the first overhead resistance [and 50 DMA] at 2940, Nasdaq appears well positioned for another new high. At the very least, expect a retest of the previous top at 3050. Note however, that for the rally to continue beyond this leg, the new high would have to be significantly higher [5 pc or more] than 3050. That is not certain at this point.
SPX: The technical damage to SPX was much more severe than those inflicted on RUT and Nasdaq. SPX tested its support at 1600 by closing well under it on four consecutive days. It made a low of 1560.33 during the correction that is more than halfway to second support at 1530. The damage can be repaired but it also confirms a weakening rally that is approaching a reversal in the near future.
SPX rallied smartly from 1560 to its 50 DMA at 1620 before pulling in to first support at 1600. The price action after the low of 1560 is constructive and implies that a rally to the previous top of 1690 is pretty much on the cards. Hard to say if we will get a new high by mid-August but the odds look good.
NSE NIFTY: Nifty corrected in textbook fashion from the top of 6229.45 down to its long-term support line at 5600 before turning up again. I had mentioned previously about Nifty presenting a buying opportunity. That was on offer last week. Nifty turned up to close the week at 5842.20, a notch above its 200 DMA. The Index could retest 5750 early next week but is now all set for another shy at 6300 overhead resistance. It may even make a new high in the process. But I would not bet on a rally significantly higher than 6300 at this point. Nifty will correct in line with world markets, perhaps with a lag and it has a date with a general election to keep. But you still have a tradable rally to 6300 or a bit more.
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 aparticular point in time. They are not predictions and none should rely on them for any investment decisions.
Sonali Ranade is a trader in the international markets