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One cannot avoid the sense that the mother of all corrections is due any time now, says Sonali Ranade
DAX has clearly been the strongest index in the EU equity markets. It represents the most robust of all the EU economies. DAX commenced a correction from the high of 8075 on March 15 that continues. There could be a bounce in the offing from 7850, but unless this bounce makes a new high [very unlikely in my view], the index is an intermediate downtrend that could test 7500 followed by the index’s 200 DMA currently at 7250. Where DAX goes, other EU markets follow.
The US markets present a more robust picture than the DAX. However, cracks in them are apparent. First, the NASDAQ 100 made a high of 2878 on September 21. After its subsequent low of 2494 on November 16, the index still hasn’t been able to make a new high. The time for doing so is running out. Meanwhile, the index has gone into another short correction from a lower low of 2816. That doesn’t confirm an intermediate downturn but it points to weakness. The index could be testing 2700 soon.
SPX is better placed than NASDAQ 100. It could go on to make a new high but has to correct before long. Note, it doesn’t need to make a new high for the long-term bull market to continue. An intermediate correction could easily see SPX testing 1420.
Meanwhile, DXY is all set to resume its uptrend against the euro and the yen. It is strong in terms of DXY as well. As the dllar rallies it will tank the commodities into deeper corrections. Precious metals are likely to be severely hit.
With DXY trending higher, commodities tanking, equity markets weakening and rest rate cycle having turned higher, one cannot avoid the sense that the mother of all corrections is due any time now. There could be a lot of blood on the carpet since almost every asset class will be correcting simultaneously.
Avoid leveraged positions like the plague.
US Dollar [DXY]: The dollar index closed the week at 82.59. DXY has been correcting from its recent top at 83.30 and in terms of wave counts, it has more or less completed its correction although it could see a lower low of 82 early next week.
Over the longer time frame, dollar continues to be in a strong bullish uptrend that could resume any time next week vaulting the dollar over its recent top of 83.30. Buy the dollar dips for more reason than one.
EURUSD: The EURUSD closed the week at 1.2985 after having nicked its 200 DMA and made a low of 1.2843. The pullback from the 200 DMA is rather tame and the move reactive.
Expect the EURUSD to resume its downtrend early next week to first test its 200 DMA at 1.2880 and upon piercing that, to look for support around 1.27 which was my target for this correction.
USDJPY: The USDJPY closed the week at 94.50. The pair has been correcting from its recent top 97.70 is nearing it end for now. Yen could resume its uptrend early next week, consolidate a bit just under 97 before resuming its uptrend.
My target for this long-term rally in the currency pair lies in the region of 102 where it will meet the downsloping trend line from the top of 280; a very formidable overhead resistance. The BoJ is reversing policy after decades and rightly so in my view. We need to understand the dynamics of internal debt for an economy far better than we do now.
USDINR: The USDINR closed the week at 54.34, just above its 50 DMA and just under its 200 DMA. Paradoxically, the dollar depreciated from 54.50 to 54 even as the equity markets continued to tank! That shows the dollar moves in the Indian market more in line with its “value” in terms of DXY rather than reflecting the cash flow in FII investment accounts.
That said, the correction in DXY is more or less over. The USDINR has basically no clue where it’s going and has been triangulating to find direction. My sense is that it will head for 55.50 as the DXY rally gathers steam. Very poor policy from RBI. They should send a few senior officers to China for some training on how to manage the exchange value of a currency to create new jobs for the young. The central banker there got a five-year extension for the excellent job he has done over the last 10 years.
Gold: Gold closed the week at 1606. Gold basically pulled back from 1560 to test resistance at 1620 and create some room for a plunge through its floor at 1525. The downtrend could resume early next week.
Silver: Silver like gold is a no-brainer. It closed the week at 28.70. Silver has been consolidating just under its resistance at 29.50 before taking the plunge below 28 and then test 26. I would be very surprised to see @26 floor hold up.
HG Copper: Copper closed the week at 3.466, well below its 50 and 200 DMAs. In terms of price, copper can see a lower low of 3.25 but my sense is that long-term players will be looking to buy these levels rather than sell. In terms of time, copper will continue to mimic the moves of the other metals. It’s just that it got to its target faster than other metals!
WTI Crude: Crude has been consolidating just above its 200 DMA and under its 50 DMA, closing the week at 93.71. It is one of the “strongest” in the commodities basket. It is not immune from corrections but most of them have been fleeting since the low of $77.
Crude can correct $89 in the ensuing correction with all the other commodities. It is hard to see it fulfilling its target of $84 for this correction. I would look to buy dips below 90.
NASDAQ 100: Warning: This not a crash, just a correction. One would expect another attempt to rally after this current correction that could go as low as 2700 from its current level of 2808. The index’s 200 DMA is also positioned in the same region.
Note that the rise in the index from 2500 is largely being fuelled by early bears and not fresh buying. When the fuel runs out is hard to predict. The current dip underway should provide a few clues. Take the garbage out.
S&P 500 [SPX]: The SPX closed the week at 1556.89. The index is the same boat as the NASDAQ 100. It is correcting to test support at 1530 but the correction could easily stretch to 1485. What can be said is that there will be a rally from either 1530 or 1485 that aims for the previous top. Whether or not it makes it there depends entirely on who capitulates first -- the bulls or the bears. I would not buy the dips in this correction till I see a convincing bounce from the 200 DMA currently at 1420.
DAX: DAX closed the week at 7911.35. My reading of the charts suggests that DAX has started on an intermediate downtrend that could see it testing 7460 or even lower levels. Warning, DAX is known for its vertical drops and so the levels can be very deceptive.
NSE NIFTY: NIFTY continues in an intermediate downtrend closing the week at 5651.35, just a touch above its 200 DMA, which is currently 5615. NIFTY may show a decent bounce from 5600 but will likely continue its correction in line with other world markets. Once it falls through 5600, NIFTY has support at 5400 and then finally at 5200, the latter being a very long term support line stretching back to 2003 and unlikely to be breached.
NIFTY has anticipated the world markets. In my view it is a buying opportunity with many stocks having bottomed out already. Investors should use the opportunity to buy blue chips in these times of doom and gloom. I would especially focus on those stocks that are completing their corrections from the top of 2007. These are likely to be the best performers in the next cyclical uptrend.
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