The rally from supports averted an immediate meltdown but the correction is far from over, says Sonali Ranade
Markets do not take out important supports or overhead resistances at the first or the second attempt. And when they fail to do so, the recoil to the starting point before making another attempt. We saw this scenario play out across most equity markets be it DAX, SPX, Russell or Nasdaq 100. The rally from supports averted an immediate meltdown but the correction is far from over. In terms of wave counts we can see another retest of the same supports before markets resume their uptrend.
Commodities like gold, crude staged sharp countertrend rallies to retest the breakdown points. Such bounces don’t last long and before the end of the last week these commodities were also turning down. The descent will gather momentum and the lows will be retested. There were reports that demand for physical gold was much in evidence. I believe all of those known facts are in the price and investor behaviour of buying dips is not a new phenomenon. If the reports are relevant we will see them in the price.
Abenomics, however, may be running out of steam. There is a looming triple top in the USDJPY pair at 100. Expect sideways movement thereafter. Meanwhile, Nikkei is at a price point from where we can expect a sharp correction that could look like a “crash”. In terms of wave counts, such correction could come last week of May, first week of June. Highly unlikely that Nikkei will make it past 14550.
The Shanghai Composite meanwhile has been retracing its rally from 1950 to 2450 and is at about the halfway mark at 2175 below both 50 and 200 DMAS. A 100 per cent retracement is likely. Worth noting that Shanghai has started its correction in February this year much before the other markets.
Treacherous markets ahead. Expect elevated volatility.
Gold: Gold closed the week at $1453.60 after having made a high of 1482.30 during the week. Interesting to note that gold turned down exactly as predicted by the charts from the 1480 level.
Gold can rise all the way to 1550 without signalling the end of the bear market though the probability of 1480 being taken out is slim. On the other hand, both in terms of wave counts and time available, gold should at the very least retest $1300 before beginning a counter trend rally. I don not think we have seen a bottom in gold as yet.
Silver: Silver closed the week at $23.76 after having made a high of $24.34. Both in terms of time and wave counts, silver has plenty of space to find a bottom. One is not in yet. I would be surprised if silver doesn’t take out the $20 level shortly.
HG Copper: Copper closed the week at 3.1845. I don’t think copper has ceased to be Dr Copper. There is fairly sustained downtrend in the Shanghai Composite that confirms we haven’t seen the lows in copper yet. Expect another attempt to take out the floor at 3.10 fairly shortly.
WTI Crude: Crude continues to behave rather crudely, following the wave counts but taking out important levels in counter-trend rallies. In this respect it is acting much like gold where buyers are lapping up dips. But then markets have a way of crushing such buy-the-dip investors who only provide fuel for long-term trends.
WTI Crude closed the week at $93, after making a high of 93.87. Crude could find support at its 200 DMA at 91.50 for a few days of more bounce. But eventually, I expect crude to return towards the $84 region.
US Dollar: The DXY closed the week at 82.57. DXY is consolidating just above 81.80 for a renewed assault on the overhead resistance at 83.50 followed by 84.25. It could retest 81.80 before making new highs.
EURUSD: The Euro closed the week at 1.3026. The counter-trend rally in the euro appears over. Barring a bounce off its 200 DMA at 1.2950, expect the euro to resume its drift towards the 1.27 region.
USDJPY: Has Abenomics run its course? As shown on the chart alongside, a double top is in place and a triple top looms for the USDJPY at 100 Yen. From the charts we must expect a reversal from 100, which will confirm on a violation of 96. There is scope for some sideways movement in the currency until September this year. I am neutral on the $Yen at these levels.
USDINR: Despite the deteriorating fundamentals, there appears to be no dearth of dollars in the INR markets. The dollar closed the week at 54.37. Expect the dollar to seek higher levels in the coming weeks where it could drift towards the INR55 mark.
Shanghai Comp: Shanghai could launch into a counter trend rally from its current level at 2178 to 2250. However, the more likely course is a plunge towards 1950 if 2150 is taken out in the near future. From the wave counts, oscillator charts etc, indications are that we are heading for a “mini-crash” towards 1950 in the next few weeks. Will 1950 hold? Don’t bet on it. This is China.
Russell 2000: The Russell 2000 closed the week at 935.25 having rallied up from its support at 895. In my view the correction that began at 954 on March 15 is not yet over and we will see another pull back to 895 levels before the rally resumes and attempts at another new high. A violation of 895 would see Russell plunge to 855 where its 200 DMA rests. The probability of that happening has receded somewhat.
Nasdaq 100: I have been greatly puzzled by the massive inverted S-H-S on the Nasdaq 100 chart and have wondered how it will resolve. I think it is best to treat the whole pattern as a potential “loose” triple top. More details when I have confirmation.
Meanwhile, Nasdaq 100 continues in a corrective mode and we can expect it to retest support on its 200 DMA at 2725 in the next week or so. This is not the end of the long-term rally. But we are getting to the beginning of the end.
S&P 500 [SPX]: The SPX, like the other indices, continues in a corrective mode although it started its correction much later than others. The SPX could make a new high but the more likely course is a retest of support around 1530. The correction won’t terminate the rally even if we see a plunge down to 1490 that is possible but not probable.
NSE NIFTY: The Nifty closed the week 5871.45 after making a high of 5924.60 during the week. I do not the think the correction from the recent top of 6110 in the NIFTY is complete. What we saw was a counter-trend rally from 5487 to 5924. With the rally done, barring a small pullback, expect the downtrend to resume towards a retest of 5400.
We could see some sideways movement at the higher end of the range as the market readies to take the plunge. The coming dip would be a buying opportunity in a different set of stocks from the last one except banks, which could repeat the last plunge. Wait to buy at your levels.
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