Hoard cash. There will be plenty of time and opportunity at far lower levels, warns Sonali Ranade in her weekly Market Notes
Commodity markets have been marking time, waiting for the equity markets to complete their rallies before they make up their mind. The currency markets are clearly anticipating a market sell-off in equities that sends dollars racing back to the safe harbour of US treasuries. If the scenario comes about, a huge robust dollar rally will force every other market to find its new level in relation to it. That also means that commodity markets will finally show us their final support. Those sitting on cash will have ample opportunity to stock up the best goodies. So don’t be afraid of cash no matter what the pundits tell you about negative real interest rates.
A surging dollar will put extraordinary pressure on RBI and the INR. The RBI may be prepared to battle on till DXY gets to 85 but I suspect the true target is 89. Not sure what the RBI’s reaction to $-INR at 70 will be. The RBI had ample warnings of the fiscal and CAD deterioration. It had also ample warning about the INR being over-valued. Instead of actively making markets and guiding them higher or lower to effect smooth change, it slept and then woke up in a panic. The RBI must understand that markets are always made, they do not just happen. If the RBI will not do it some other foreign bank cartel will. The only difference is that the cartel works for its own profit and the RBI loses control over the market. So please learn to make markets; and money. The days of central banking by administrative fiat are over. Dead. Gone.
The Nifty is delicately poised on the neckline of a large inverted S-H-S with a target of 5000 from the neckline of 5600. That’s the good news. The bad news is that there is no rule which says the fall will stop at the target. All it says is a bounce then results. There could a short bounce before the neckline is breached to the 200 DMA area. But in all other respects the Nifty has decided not to wait for world markets to tank.
Hoard cash. There will be plenty of time and opportunity at far lower levels than these.
That should give the RBI some breathing time in managing gold flows into India.
The basic wave counts haven’t changed because of the switch-over though quite a few the “anomalies” in prices have got ironed out. Brent, as WTI Crude, is in counter-trend rally from the low formed in June 2012 and that cycle appears to be coming to an end in August. The extent of the next leg down will tell us if the correction in crude prices is over or there is some more consolidation ahead.
Brent could shoot for $120 over the first two weeks of August before turning down for a correction. The structure and extent of the next correction will tell us where Brent is headed over the medium term. Exit at rallies.
Since this piece is all about technicals, I won’t venture into discussing the expected correction in equities, the consequent sell-off and search for yields in the US bond markets. But one thing is clear. A positive real yield in bonds, backed by some GDP growth, is available only in the US and that’s gonna make inflows in dollar assets a given.
A resurgent dollar will rip through commodity markets, and equities of course. Nothing will be left untouched. So the question is, will the rally extend beyond 85? My sense is yes, given the extent of correction we saw in wave 4 that is just ending. Humongous volatility ahead.
The pair closed the week 1.32810. The descent to 1.27 will be paced by the DXY and the extent of sell-off that we see in Europe. Likely to be a very volatile trip down with vicious counter-trend rallies.
We could have another leg of a correction down to the 59 area from 61 over the next few days but the major trend remains up and a target of 62.50 looks close at hand.
The $-INR cannot remain immune to the strengthening the overseas dollar where I expect the DXY to rally from 81 to 85 [an up move of five per cent]. That makes for a $-INR of 64 just [based on a buy in Singapore and sell in Mumbai model.] Of course, the reality is much more complex and some of the move from 81 to 85 is already in the price. Even so, expect an correction to be short and fleeting while the $ trends up to test new highs.
The RBI’s real problems will begin if the US equity markets tip into a deeper correction than 10 pc and the DXY shoots beyond 85 to 87 or even 89. The 87-89 is not ruled out. If you remember, I had set my target for DXY for this full rally from 72 ay 89. And that appears well within reach.
The RBI’s trading restrictions may help it manage the politics but the consequences for its credibility as a central banker are not worth contemplating. The RBI was sleeping at the helm.
To my mind, Nikkei remains in a downtrend from the top of 16000 and the downside target, in tandem with other world markets, could be well below 11500. So the next rally in Nikkei is best watched from the sidelines.
And if QQQ just meets the target or is marginally higher the probability of the following correction being deep enough to tip the market into an intermediate correction is very high. Exit and move to the sidelines. Avoid shorts till we are close to August 16 or we clearly have a top in place.
Could the SPY at $175 or better obviate the need for a longer term intermediate correction? It is a close call. The SPY tanked from a high of 165.55 in the last correction to a low of 156 or 9.55 points. On the other hand, it has added only four points to the top of the previous rally and could add another five before it pauses for a correction. So we have nine down - nine up. Too close to call at this point.
Shorts not advised at this point but overall exit all long positions before August 16 and wait patiently for a correction to sort out the market direction.
In the normal course, I would expect a respectable pullback from the neckline at 5650 to the 200 DMA before taking another shy at the neckline. I don’t think the neckline will hold for long and that gives the Nifty a target of 5000. That would also more or less complete the correction in Nifty in tandem with the world markets. Of course the process will take time.
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