The fall in equity values following the spike in interest rates was sharp but very shallow; stopping just at the 50 DMA for most markets even after the first 5-wave leg down was complete. That shows markets could have another leg up that could make new highs, says Sonali Ranade
The spike in interest rates, and the consequent drubbing in equities and bond values, convinced the most ardent sceptic that a turn in the interest rate cycle is now well underway. The process won’t be done in a hurry though. Panic is unwarranted, never mind the headlines. Expect yields to drop back to 2 per cent over the next few weeks before drifting up again.
The fall in equity values following the spike in interest rates was sharp but very shallow; stopping just at the 50 DMA for most markets even after the first 5-wave leg down was complete. That shows markets could have another leg up that could make new highs. However, that should be balanced with the wave count of the rally itself, which suggests the next leg up could be the last for some months. So tread warily with exit plans for positions near at hand.
Back home, the dollar made a new all time high against the INR, validating an outcome that I have long suggested much against popular and professional opinion. But a pullback may be on hand and the dollar may consolidate its gains for many weeks before moving on from here. A panic is unwarranted because the worst may be over for a while.
Nifty is into the beginning of a complex correction that could trace out a new high even as it reaches for 4500 by 2014. Rather tumultuous times are in store for Nifty, which makes it a trader’s delight but an investor’s nightmare. I expect it will test 5600 before rallying with the rest of the world markets. As with other markets, keep exit plans handy even if it makes a new high.
Yield on 10-year USTs:
The yield on 10-year USTs topped 2.25 pc before closing the week at 2.12 pc. The overhead resistance 2.30 pc on yields is unlikely to be taken out in a hurry, never mind the near panic in bond markets. While the interest rate cycle has undoubtedly turned, it is not as if rates are going to spike to 4 pc next Monday. These things take a long time and many panics. Expect yields to drop back to 2 pc over the next few weeks before drifting up again. Long term, bonds remain bearish.
Gold: Gold closed the week at $1387.60. The short-term correction from the recent high of 1423.30 appears to be nearing an end and gold could resume its rally to $1550 shortly. The bounce to $1550 from $1320 is reactive and long-term, gold remains bearish.
Silver: Silver closed the week at $21.9540. The corrective upward bounce in silver from its recent new low of 20.15 appears to be nearing an end, and the downtrend to retest the $20 floor could resume shortly. I don’t expect the $20 floor to hold when tested. The final denouement appears to converge on mid-August.
HG Copper: HG Copper closed the week at 3.20150 and appears on course to retest 3.05 level by end July. Copper, among the strongest in the metal groups, also confirms a long-term bearish trend. No guarantee that the floor of 3.05 will hold up.
WTI Crude: WTI Crude closed the week at $97.85. Crude continues to betray the classic signs of an oversold commodity in a bearish trend. Over the long term the price keeps dropping but is frequently interrupted by very sharp rallies that almost negate the downtrend. The rally to $98 from the recent low of 91.57 was reactive and in line with crude’s odd price behaviour. Expect crude to resume its downtrend to $84 early next week.
US Dollar Index: The correction underway from the recent top of 84.57 has been as sharp as the rally from 79 level but comes in the place where one would expect it. Having tested the 200 DMA, my sense is that the price correction is now over and the dollar Index could rally back towards the 83 level as early as next week. Maintain my bullish outlook on the dollar.
EURUSD: The rally in EurUsd from its low of 1.2838 could be complete at 1.34 and we could see a retracement of the rally down to 1.31 over the next few weeks. Movements in EurUsd are likely to be confused and erratic but generally speaking it will meander towards 1.37 over the next couple of months.
USDJPY: UsdJpy closed the week at 94.07. While the yen has grabbed popular headlines for its fall from grace, the fact is that the current dollar drop hasn’t yet tested even its 200 DMA. While not ruling out a further drop to 91 next week, my sense is that the fall in the UsdJpy is now overdone and we could see a fairly sharp rally towards 102 over the next few weeks. Long-term, the dollar remains bullish against the yen.
USDINR: UsdInr made a new all-time high of 58.98 during the week before closing at 57.49. The new high validates my wave count detailed many times despite popular and professional opinion to the contrary. My sense is the dollar needs to consolidate is gains and could now come down to as low as INR 55 before it makes any attempt to stake out new territory. The down move will be reactive.
DAX: DAX closed the week at 8095.39 just a wee bit under its 50 DMA. Its 200 DMA is further down 7650 and is unlikely to be challenged in the current drop from 8557.56. In terms of wave counts, the fall may already be over, and barring a retest of 7900 early next, we may see DAX rally for 8500 again. Whether it makes a new high or not shouldn’t matter. DAX is due for a major correction over the next few weeks.
NIKKEI 225: Nikkei closed the week at 12686.52, well below its 50 DMA but also well short of its 200 DMA at 11,000. Nikkei needs to consolidate somewhere between 11000 and 13000 over the next few weeks before deciding its next move. My sense is that Nikkei could drop to 11500 early next week before rallying modestly towards 13000. Long term, Nikkei is not bearish and uptrend remains intact.
Shanghai Comp: Shanghai closed the week at 2162.04, well below its 50 and 200 DMAs. The down move confirms 2160 as a new overhead resistance. Furthermore, it validates a wave count that suggests a retest of 1950 over the next couple of months, probably in sync with the rest of the world equity markets. Shanghai could present an excellent buying opportunity in the next few months.
Nasdaq 100: Nasdaq 100 closed the week at 2943.86 just above its 50 DMA. Its 200 DMA lies unchallenged way below at 2800. And in terms of wave counts, the first leg of the down move is mostly done already. In short, expect a retest of 2950 early next week followed by a rally back towards 3050. A new is probable but is most likely to be the last for some months.
SPX: SPX closed the week at 1626.73 bouncing off its 50 DMA. The 200 DMA lies unchallenged at 1500 while the lowest point of this correction failed to dent the previous high at 1600. In short all is well for another new high in the SPX over the next three to four weeks. My warning on Nasdaq 100 holds good for SPX as well. While we will probably see a new high on SPX, it will likely be the last for some months to follow. So an exit plan for trading longs should be handy.
NSE NIFTY: Nifty closed the week at 5808, just a notch above its 200 DMA. Is the correction from the recent top 6229.45 over? While not ruling out that possibility, my sense is that Nifty should come down to rigorously 5600 level next week before rallying back towards 6300. There is time and space in terms of wave counts to do so. Nifty is likely tracing out a complex corrective pattern to the rally from 4530 to 6110 that will span some moths during which we could see a new high. I would exit trading position on a rally to 6300.
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 no one should rely on them for any investment decisions.
Sonali Ranade is a trader in the international markets