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Most markets are poised at crucial turning points

July 08, 2012 23:28 IST

The critical points will unfold over the next two to four weeks, says Sonali Ranade

Major markets are poised at crucial turning points. These will unfold over the next two to four weeks. I have therefore concentrated on explaining the setup in each case and tried to identify the earliest signals that may point to the future direction the markets may take.

Gold [GCQ2]: As expected, gold tested but did not pierce the "triple" top positioned at $1640. After rallying from $1550, gold turned down again from just under $1640 to end the week at $1582.29. As I have mentioned many times earlier, the first leg of gold's correction ends some time mid-July, and in fact could end next week. The critical level to watch in the ensuing week will be $1520.

If, over the next two weeks, gold does not break its floor at $1520, an intermediate tradable rally in gold can begin. The possibility of a break below $1520 should not be ruled out. Such a breakdown in price would imply a fairly long-term bear market in gold, which could see the metal trade far below current levels.

On the other hand, a bounce-back from $1520 or above will signal a tradable rally that will take a shy at the previous top of $1920 over a six- to nine-month period. The probability of either outcome is more or less even at 50:50. Traders should watch price action between $1550 and $1520 to see which course the market takes. Interesting and nerve-wracking time ahead for gold traders.

The first confirmation of a breakout to the topside will come on price piercing $1640.

Dollar Index [DXY]:  This blogger had the conviction to be a $ bull for the last one year or so when all expert commentary was bearish on the currency.  The buck hasn't disappointed by its performance either, having rallied from 73.26 in May 2011 to a close of 82.9420 last week, just under its previous high at 83.6700. Can the $ rally higher?

We are in the very early stages of a $ bull run that has a long way to go. Some strategic pundits may find that strange but the message from the markets is that the $ will make big waves. 

After making a high of 81.06 in January this year, the $ should have gone into a correction which it dutifully did. But the correction since has been very shallow and brief. Even so, the short time spent below 80 has resulted in an explosive break above 82, not just 80, and a very brief correction from the high of 83.67 and we are back challenging the highs again. Few currencies exhibit that kind of strength where the market expects a correction instead of new highs.

The comments above don't mean the $ is on a one-way trip up. It could break atop 83.67 before a significant correction or could turn down again from that level to make another assault later. Either way, the $ is a buy at every dip. Don't short the mighty buck.

Euro$ [EURUSD]: As expected, the euro turned down from 1.2700 to go into a virtual free fall, closing the week at 1.22869, exactly at the previous low made on June 1. The price action is distinctly bearish.

The next logical target for the euro is 1.19 though it may rally a bit from present levels before making its way to that region. In terms of wave counts, the fall in the euro has much time and distance to go. In fact, indications are we may be in a full five-wave impulse move down on the euro. We are only into the wave III of that move down. The first confirmation of this scenario playing out will come on a decisive violation of 1.19.

I remain very bearish on the euro in the intermediate term.

WTI Crude [CLQ2]: Oil rallied from low of 77.28 to just under $89 before closing the week at 87.2. Oil can see two scenarios play out over the next six to eight weeks with more or less equal probability. As usual, we will let the market tell us where it wants to go.

The first, very straightforward scenario is a rally in crude that takes it beyond $90 level for a while in an attempt to close the gap between 92 and 105 that persists on the charts.  This will imply an intermediate correction in the market that could see crude range between $100 and $76 till the end of December this year. The probability of this scenario is about 40 per cent.

The second scenario is for oil to compress in price between $90 and $76 till the end of July early August before an explosive breakout, probably to the topside. In either case, oil price is not likely to stay suppressed for long. 

Unless the $76 level is violated decisively in the next few weeks, the probability of a long-term bear market in oil is practically zero.

Silver: Silver closed the week at $27.05. The first leg of the correction in silver ends by the four week of July. If the metal doesn't break floor at $26 in the ensuing couple of weeks, it could be in for a substantial bear rally. Bears should cover shorts.

A breach of $26, on the other hand, will see substantial decline in prices. However, the probability of the latter scenario is small. All told, bears should cover shorts.

$-INR: As expected, the $ tested but did not breach the floor for the $ at 54.3. In fact, the $ rallied sharply from that level to close the week at 55.40. 

The $ itself is set for a bullish run as measured by its Index DXY. Since the $ isn't freely traded in the domestic market, price action alone doesn't provide enough clues to determine where the $ is headed.

It would be foolish for RBI to let the INR chase the $ up both in terms of policy and the need to intervene strategically. Hence, RBI intervention should not be expected below 57.5.

I expect the $ to breach its previous top at 57.50 before the middle of August to perhaps reach 60.50. The first overhead resistance to the $ lies 56, followed by its previous top at 57.50. The $ is a buy at every dip.

S&P 500 [SPX]: The rally in SPX from the low of 1265.40 1374.81 was almost certainly reactive in nature. A breach of 1335 will confirm that we are in for a longer and deeper correction in the equity markets. A clearer picture of the nature and shape of the correction to follow should emerge by the end of this month.

On a breach of 1335, the next logical target for SPX would be 1265.

Sensex: The Sensex closed at 17,521.12 after breaking atop its 200 DMA at 17,140 making a series of higher tops and bottoms. The 25 DMA is poised just below the 200 DMA and could break above it early next week. The break above the 200 DMA, the imminent bullish crossover and the series of higher tops and bottoms on daily charts suggests a bullish breakout that would be confirmed once the Sensex breaks atop 17,900.  In fact, that might well happen and the index could race to 18,500.

However, in terms of wave counts, this is not the place and time for the Sensex to begin a bull run. On the other hand, it is the time and place for false breakouts and sharp bear rallies as we are in the last stages of a downward correction. By my reckoning, the index should keep correcting at least till the end of December this year. The wave counts also suggest the complex intermediate rally that began at end of August 2011 may actually be ending and a downturn could ensue soon.

Having said that, my reading would almost certainly be negated if the Sensex were to decisively break above 18,500 in the next week or so. Until then, I would not chase this rally. 

Remain very suspicious of this "breakout".

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