Unless the markets confirm a downtrend, don’t short the markets. Investors should wait till a direction to US markets becomes clear, says Sonali Ranade
Markets showed considerable divergences during the week with Asian and EU markets continuing to correct as expected while the US markets turned around and made new all-time highs on a closing basis.
One needs to confirm the new highs in the US markets. This the markets will do in the normal course by rallying a bit further and then testing the previous top as the new support. Until that happens, there is no call to jump into the markets as new bulls.
Likewise, the old caution to early bears is worth repeating. Unless the markets confirm a downtrend, don’t short the markets. Investors should wait till a direction to US markets becomes clear.
Elsewhere, commodities continued to correct as expected, the contrary moves in crude notwithstanding. These corrections can be quite violent as the price collapse in Corn and Lumber demonstrated. Crude may not be the exception it pretends to be. Corn was deceptive enough to warrant caution. Precious metals too are poised on the threshold of major downsides.
There were no surprises in the currency markets. The euro could test its new support at 1.27 or perhaps even 1.26. Likewise, the USDJPY could resume its rally from 94 or 93. DXY itself may test its previous high at 84.25 soon though it may not be taken out in two or three attempts.
NIFTY continues to correct in an orderly fashion with a possible downside target of 5400. I still favour buying the doom and gloom in old economy stocks that have been correcting since December 2007 and are near their long-term supports. There is hardly any negative news out there that hasn’t been factored into their current prices. Stick to blue chips!
Gold: Gold continues in a downtrend from its recent high of $1620 and closed the week at 1595.70 after making a low of 1588.40 during the week.
Gold in the final leg of its correction from its top of 1800 in October last year and the target for this leg is $1525. Expect gold to test 1570 during the week and if that support doesn’t hold, a further fall to 1525 is possible.
Silver: Silver closed the week at 28.32, just above its support at $28.
On a breach of 28, silver can head down to $26.
However, note that there is little to support for silver between $20 and $26. So a breach of $26 has major significance for silver. My sense is that it would be unwise to assume $26 will hold.
HG Copper: HG copper closed the week at it support of 3.40. You can’t get more technically correct than that!!
My sense is, barring a small bounce from 3.40, copper is headed lower to test 3.25 levels over the next few weeks as Shanghai Composite in China continues to correct. Knowing the Chinese, don’t bet on 3.25 holding ;-)
WTI Crude: WTI crude closed the week at $97.23 moving against the general trend in all commodities, which are correcting downwards in line with the correction in the CRB CCI Index.
I am very sceptical and wary of the contrarian price moves in crude. My sense is that crude could pullback 98.25 but is more likely to fall towards $84 rather continue upwards.
This analysis would be negated by a decisive breakout above $100. Despite the ambiguous wave count, I am inclined to the bearish view in crude and favour a fall to $84.
US Dollar [DXY]: DXY continue to be in a strong uptrend towards it previous high of 84.25 and closed the week at 83.175.
DXY could consolidate above 83 for a few days more before making an attempt to take out 84.25. If it does take out 84.25, as I expect over the next few weeks, the next overhead resistance then falls at 85.50.
EURUSD: EURUSD closed the week at 1.2818 after making a low of 1.2750 during the week.
There are few days more to go for the correction in EURUSD, which could see it taking out the 1.27 level, which was my target for this correction. Upon nicking 1.27, the EURUSD could show a decent rally to its 200 DMA at 1.29.
But first let the EURUSD get to 1.27 or perhaps even 1.26.
USDJPY: USDJPY closed the week at 94.19 yen.
My sense is that the correction in USDJPY from the high of 96.71 may be over or is at worst likely to test its 50 DMA at 93 before the dollar climbs back towards 97 yen.
A decisive breach of 93 yen will negate this analysis. Keep handy stop loss just below 92.50.
USDINR: USDINR closed the week at 54.28 just under its 200 DMA.
The dollar has shown marked reluctance to pierce the 200 DMA upwards for the past few weeks. On piercing the 200 DMA to the upside, USDINR could see 55 INR although the probability of such an event is low. The more likely possibility is for USDINR to test support at INR 54 and if that gives way, to test 53.50.
Unless the $ decisively breaks above the 200 DMA over the next week, my expectation of a rally to the 55 mark is likely to be belied.
DAX: DAX closed the week 7795.1, just a touch above its 50 DMA.
DAX can extend the fall all the way to 7600 before attempting a decent rally. On the other hand it could rally towards the previous top from the 50 DMA itself. In either case DAX will have to make a new high in the next two weeks to negate the downtrend that started from the top of 8074. And until it does so convincingly, the main trend remains negative.
NASDAQ 100: NASDAQ 100 closed the week at 2818.69, a new high negating my expectation of a top having been made at 2810.
Rather than jump onto the bullish bandwagon I would wait for a confirmation of that the previous top of 2810 is now the new floor. In the normal course, NASDAQ 100 can be expected to continue its rally to 2830 or so and then correct to test 2810 as the new support. Until that test is convincingly passed, I would treat the “breakout” with extreme caution.
S&P 500 [SPX]: Contrary to my expectation that we had seen a top in the SPX at 1563.50, the index turned around and closed a new high of 1569.19. One doesn’t argue with a new all-time high, never mind the poor volumes. But one must not throw caution to the wind either.
Like the NASDAQ 100, we must expect SPX to rally a bit more, perhaps 1575 or a bit higher and the come down to test 1563 as the new support for the market. Until the previous top holds as the new support convincingly I would treat the new top with circumspection.
NSE NIFTY: NIFTY closed the week at 5682.55, just a notch above its 200 DMA.
Barring minor pullbacks, the correction in the NIFTY can continue till the third week of April and may ultimately test the Index’ main upward sloping trend line from 2003 that lies at 5400.
A breach of the 200 DMA early next week will more or less confirm that we are going to 5400 before we see a decent rally.
My analysis would be negated if the NIFTY were to pullback above 5800 in line with the new highs in the US markets.
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.
Sonali Ranade is a trader in the international markets
