India missed the bus on reforming its POL sector

As expected, the government did not move in time to grab the fleeting opportunity for POL sector reforms, writes Sonali Ranade in her weekly Market Notes

Gold [GCQ2 & GLD SPDR]: Gold has been in a price compression zone with a floor at $1526 and declining tops below $1640 since the middle of May. The price compression indicates a "breakout" from the tight range next week. Can the direction be predicted?  That's a tough call.

In the normal course, one would expect a breakout from a congestion zone in the direction of the major trend, which for gold is down. However, my wave count [not discussed here] suggests a breakout upwards towards a retest of the 200 DMA, which is currently positioned at $1660.  

Note the 161 area on the GLD SPDR chart on the right edge. This corresponds to the 200 DMA $1660 area on the metal's chart. If we are in an impulse move down, and therefore in Wave III, this happens to be where we could expect gold to breakout in the "false" direction before moving down eventually. In such a move, the 200 DMA could be nicked. This would not be a bullish breakout though.  

On the other hand, a move below $1520 would signal a further downside to gold prices in a rather tame fashion.  

Either way, I remain bearish on gold until a decisive breakout above $1700 is triggered.  

Dollar Index [DXY & $USD]: The dollar has had an extraordinary bull run from the level of 73 in May 2011 to 83 in June 2012, spanning almost a year. While the bull run is by no means over, we are now into a cycle where some correction or sideways drifting must be expected. The question is, when and from where does that correction begin?

Over the period of next 2 months, I expect the dollar to maintain its bullish bias and consolidate above 83 but below 85. Note the currency is well supported around its 50 DMA on long-term charts and this spans the 82 to 83 area currently.

A good place for the dollar to test its 81.50 support level would be towards the end of August. Until then, the dollar is a buy around 82.50 levels and a sell around 84 but with an upward bias.

Euro$ [FXE & EURUSD]: You have to have a very brave heart to call for a stop to the Euro's slide in markets. But it is time to note that the latest slide from the level of 1.350 since February 24 this year is now overextended and due for correction. But for that the slide has to end first. Where will it end?

A good place for the slide to end would be 1.19, the bottom made in June 2011 and a good time to make the bottom would be end of July.  In short we are very much towards the terminal stage of the current slide and should look to cover shorts on dips.  

No time to short the Euro at current levels unless the floor at 1.19 is taken out decisively.  That possibility is fairly remote.  

Not buying the Euro just yet. The upside is likely to be capped at 1.24 in the immediate future.

WTI Crude [$WTIC]: WTI crude's 200 DMA currently stands in the $95 area while crude is positioned at $91.56. Over the next few weeks I expect crude to drift upwards, with corrections of course, to test the above-mentioned DMA. In fact, crude could move up all the way to $100 before a significant correction though it won't happen over a week.

Barring a brief correction from the $100 level, it is safe to say we won't be seeing crude below $80 for another year or two.

As expected, the government did not move in time to grab the fleeting opportunity

for POL sector reforms. We just don't get markets and end up fighting them like foolish amateurs.

Silver [$SILVER]: Silver closed the week at $27.24. Silver is due for a correction to the upside after a fairly long slide down all the way from $37.50 in February 2012. It appears to be creating a base for such a rally at just above the $26 level.

I am by no means bullish on the metal. The correction to the upside will be volatile and may not stretch beyond $31 in the near term. Cover shorts but avoid long trades.

 

 

$-INR: The $ closed the week at R55.32. It generally spent the week in a narrow range consolidating for a move either way.

Over the next two to three weeks, expect the $ to be capped at R56 and to generally trend down towards R54 region. Before the next major move up, the $ has to retest its new floor in the 53.5 to 54 region in the next two to three weeks time.  

I expect the floor will hold at 53.50 as before.

 

 

 

Shanghai Composite [SHCOMP]: The Chinese index last bottomed out in June 2012 at a level of 2132, when I had indicated that despite all the bearish doom and gloom in China, its equity markets may have put in a bottom at 2130.

From 2132, SHCOMP rallied to 2476 in March 2012 just under its 200 DMA without nicking it. Since then it has had an orderly correction and made a double bottom last week at 2138.  

The index stands at 2168.64. In the ensuing week, the market could retest 2138. If the floor holds, the floor at 2130 will be confirmed and Chinese stocks become a buy once SHCOMP breaks above 2200, which is its 25 DMA area.

S&P 500 [SPX]: SPX closed the week at 1362.66 after making a high of 1375.26. To my mind, the series of higher tops and bottoms formed since the point 1273.83 on June 5 are too volatile to qualify for anything other than a pullback to the top.

While not ruling out another shy at the next overhead resistance at 1390, I remain sceptical of the rally. Over the next week SPX could take support at its 25 DMA and attempt another rally to the 1390 region.

I would sell rally tops.

The next formidable resistance after 1390 is 1400.

SENSEX: Note, the Sensex is fast approaching a golden cross with the 50 DMA poised just under the 200 DMA in the 17,000 region. It is hard to miss its significance.

The Sensex is correcting down to the 17,000 region and will surely test this region over the next week. I expect the index to hold above 17,000 and thereafter rally to 18,500 barring the usual corrections. However, I would not pronounce myself bullish on the Sensex just yet.

The Sensex needs to come down and retest the 15,500 region again. So while I would buy my blue chips at my prices with a view to hold, I would not long to trade even if 17,000 holds up next week or the week after.

Markets may fall out of their usual sync for some time. Time to be very careful.

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.