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Beware of rallies that fade out quickly

July 30, 2012 12:25 IST
These are times to buy as prices crash; at your own pace, at your prices, says Sonali Ranade

GOLD:  Last week I wrote this on gold: '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 the 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.'

As you can see from the chart above, gold did break out upwards and over the next week could test its overhead resistance of $1660, which also happens to be its 200 DMA area. 

Unless the 200 DMA is decisively taken out, this will not be a bullish breakout.  I remain bearish on gold in the long term.

Dollar Index: This is what I wrote on the Dollar Index last week: '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?'

During the week the dollar corrected from 84 down to 82.71, just above its 50 DMA at 82.54. It may find support in that area and rally up. The prognosis remains the same as that of last week. Over the next two months, expect the dollar to consolidate in the 82 to 85 range with an upward bias. Buy the supports and sell the rally tops but avoid shorts.

 

 

Euro$: This is what I wrote last week on the euro: '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 bthis 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.'

The euro made a low of 1.2040 [just above the 1.1900 that we expected as the turning point], and rallied smartly to close last week at 1.2281 after having made a high of 1.2390.

Once the euro$ clears the overhead resistance at 1.2400, it will be time to be cautiously bullish on the euro. Until that happens, a whipsaw or two to retest the 1.20 floor should be expected. Long-term, the euro is not out of the woods yet. The ensuing rally is reactive in nature though likely to be violent.

WTI Crude: This is what I wrote last week on the WTI Crude prospects in the medium term: '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.'

During the week, crude reached for its 200 DMA overhead resistance currently positioned at $93.5, and corrected from that area after hitting a high of $92.94. Crude made a low of $86.84 during the week, which is its 25 DMA and then rallied to close the week at $90.13. With this, to my mind, the brief correction is over and we can expect the crude to rally towards its 200 DMA during the ensuing week.

The long-term prognosis remains the same. Crude will remain a buy at dips commodity for hereon for a couple of years.

Crude has the potential to severely deflate and derail the Indian economy in the next two to three years. Indian policy-makers have been pretending ostrich like that crude will revert to "normal" levels since 2012. Meanwhile, crude has gone from $20 to $100 and we have made no significant effort to either price in the commodity properly or to reorient the economy towards more efficient use of the product. Unlike other countries like Pakistan and Bangladesh, out fragile middle class demands fuel subsidies, which is very strange.

Unless our pusillanimous political class wakes up soon, we are heading for a major disaster on the oil front. Petroleum subsidies, which largely go to the rich and middle class, now total Rs 1,90,000 crores, a sum twice as large as that expended on food and unemployment mitigation schemes which together consume only Rs 90,000 crores.

Silver: This is what I wrote last week on silver in a then falling market. '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.'

Silver has multiple overhead resistances spanning from $28 to $31. If silver is in a long-term bearish market, a view I favour, then a rally to $31 is the most likely scenario from hereon but with fairly violent corrections. A violation of $26 would negate this view.

 

 

$-INR: This is what I wrote last week on the $-INR: '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.'

The $ rallied to just over 56 during the week and then headed down to close the week at 55.24.

The scenario hasn't changed. I still expect the $ to retest its floor at R53.50 over the next weeks or two before heading up. It will not be a one-way move though. Expect corrections even as it moves towards the R54 area.

Shanghai Composite: I think the Chinese nicked the floor at of their index at 2130 just to prove me wrong!  Here is what I wrote last week: '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.'

The fact is, I expected 2130 to hold but it did not. The index made a new low, 2120.63, and closed below 2130, the exact close being 2128.76.

Technically, this violation of 2130 [not decisive yet, so I could still be right in my original view] opens the way for a drop to November 2008 lows of 1680. There are multiple resistances on the way, a major one being 2050. While the Chinese markets are known to test the extremes of their turning points rather rigorously with frequent violations, I am not convinced the fall will in fact continue. 

I expect a rally from here to the 2230 region before the market comes back to retest 2130 again. In terms of time, the market can do this right up to the end of August. So barring a collapse from here, my prognosis may well hold.

I would buy here with a stop-loss place just under 2050.

S&P 500 [SPX]: And this is what I wrote last week on the SPX: '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.'

As you can see from the chart, SPX did exactly that. It took support around 1330 and took another shy at 1390, closing the week 1385.97 after having made a high of 1389.19 on Friday. 

Upon a violation of 1390 to the upside, a challenge to the previous top at 1422.65 becomes a possibility. Going by the wave counts, that is a possibility. But it would be an event that would completely change the "nature" of the correction we are in. It is a bit too early to anticipate that but it is something to be borne in mind. Aggressive shorting should be avoided at this stage.

On the other hand, even a violation of 1390 to the upside will not signal an end to the correction but only change its scope and nature. More on that in the next piece.

Meanwhile, I advise to stay out of the market for a while. This is one bull-bear war best watched from the sidelines. When the big guys war, we get slaughtered. So watch them fight and pick the winner at your leisure!

Sensex: This is what I wrote on the Sensex last week: '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.'

Lesson learned: The punters on Dalal Street don't think too highly of golden crosses or 200 DMA!

The Sensex corrected as expected but paid scant attention or respect to the 50 & 200 DMA knifing right through both as if they didn't exist. Well, not exactly. They did hesitate a bit before taking out the 200 DMA.  

The 17,000 now becomes an overhead resistance. The Sensex could test the area a couple of times before moving down. 

I expect the index to drift down over the next few weeks to retest the 15,500 area. That said, these are times to buy as prices crash; at your own pace, at your prices.

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

Sonali Ranade