Market Mayhem: End of the mayhem?

I started writing this blog post with the headline 'market mayhem' with a view that stock prices in India had a huge room to fall. Back then markets were trading at 5000 Nifty Index level. Over the period of time we have seen periods of very high inflation where domestic CPI touched levels of 20% in some cities. With stocks being punished heavily due to risk aversion sentiment across the equity market there was little respite for any sector.

In the last few months little has changed in the sense of economic parameters other than some fiscal measures and another round of same old monetary medicine being administered by RBI in India.

Lets see what has really changed for India in the present scheme of things.

First is the change in the apparent value of Indian equity markets. The last few years were exceptional where foreign money scrambled for stocks in emerging markets with a view to make superior returns. In think this sentiment will not return for years to come. The very base of this capital flow was institutional money and lot of super HNI clients investing through the hedge fund route. That would stop as most of these so called alternate investment funds in western markets have gone under.

The basic foundation of the Indian growth story has been higher domestic demand. However, the real demand has to remain robust over the next few years in order to drive the economic growth. Indian central bank has blindly followed other banks to increase money supply in order to end the current credit crisis. In the short term it may work, but over a period of time, this would be a disaster in itself if not controlled. Fiscal measures is the need of a growing economy, if at all any measure is required for a free market to grow. Too much control in the hand of central banks have done nothing great in the past and would not help in the future.

Second, Indian growth story would get stronger with rising income levels as propensity to consume and produce increases. It should in no way be magnified with excess capital, read money supply, without considering its after effects. A proper mechanism for growth would be to reward growing sectors and reduce entry barriers in under performing sectors. Indian policy makers are know to do the opposite. Financial sector in no way should become the central and core issue in policy making. In the last few years, pricing issues, financial regulations and price controls have dominated the policy making in India. This trend is dangerous for the long term health of the economy. Rather policy making should focus on core sectors like mining, power and infrastructure.

Third, for any sustainable economic development to happen, domestic power generation has to rise multi fold. This would lead to increase in the standard of living in various small town regions and induce economic stimulant effect.

I would cut a long story short here. Lets just see what the markets have to offer here. Now, in the short term the stock prices are showing a strong trend. There is very little activity in other markets which shows similar price action.

Indian bond markets have given clear signals of loose monetary policy in the next few quarters. However other markets are not showing very strong signals. Indian rupee has not strengthened and remains a weak point to build a bullish case. Commodity prices in India are still falling and are expected to remain soft.

Indian growth story is going to rebound by the end of this year. This is apparent from relative strength in equity prices. However bond yields need to remain low for economic growth to get the necessary stimulant effect of fiscal measures. But market driven yields on the long end of Indian markets show expectation of strong economic growth.

Going to the elliott wave count that I had posted earlier. I think the wave '5' down of ABC has resolved in a truncation. Though markets have gone into a rectangular formation and there is actually a low probability of any view being right here, I feel markets have formed a cyclical bottom if not a major bottom. See the following graphs. A good strategy from here is to buy out performing sectors which are dirt cheap when index goes down to 2780 to 2850 levels. See the following graphs. I think there is risk to this count but this is the most probable count at present.


Nifty Daily

Nifty Weekly



Nifty Monthly


Prices suggest that index has bottomed out. Lets go with the prices and call this a bottom, which means new lows are highly unlikely in the near future.

Shanghai Above 200DMA

Shanghai's SSE has broken above its 200 DMA. Weakness is to be bought in this index and a weekly close above 2460 will indicate the beginging of a bull market.

Euro wave count

Euro is poised to decline from current levels. The following two graphs are self explanatory. 1.43 is the resistance to risk, rewards could be much larger, possible 1.16 euro levels.

Euro Long term wave count -



Short term -

Elliott Wave Count on Gold - IX

Gold prices have done nothing in the last six months. Gold is one of the few asset class which has not declined in price compared to massive decline in other asset classes. From being a long term bull in gold and maintaining the view that gold prices are headed to $1200 over a period of time, I have become cautious of the rising bearishness in the underlying gold market. I have expressed this opinion in my intermarket articles which called for a top in gold when it touched $1000 few weeks back. See this link

The continuous flow of funds to ETFs has been taken as a big positive for gold's bullish case. I don't share that view. The mass investments always don't do good in terms of returns. Gold price in terms of Asian currencies have been very strong and especially in terms of INR. Gold priced in INR terms has made higher highs continuously and still looks like it is forming a consolidation inside a flag. The INR depreciation has played a pivotal role in the current rise in gold prices in India.

My last elliott wave count involved the probability that gold was forming an ending diagonal in the double zig zag final upleg 'c'. However that proved dead wrong as gold first declined nearly $80 and then gave a strong upward rally negating the formation.

I am revising my long term wave count in gold. Primarily I think gold is still in the wave four forming the second leg of a ABC-X-ABC flat or an expanded pattern. Take a look -

The current move in gold being the intermediate corrective wave can rise disproportionately. The wave structure in gold prices is quite complex and the fall should happen in simple ABC correction once the intermediate 'x' completes.

The view that gold prices might break to new highs before declining comes from the fact that prices have again broken out of consolidation. A giant broadening formation has been successfully tested in gold which gives an expected target price of around $1210. See the graph below -




The short term wave count looks like we have entered the wave 'c' in the flat or an expanded abc wave. Take a look -



Gold has been viewed as safe haven and it has risen quite well relative to the financial sector in the US. The S&P Bank index relative performance to the S&P 500 has been quite useful in understanding the short term strength in the risk aversion sentiment. S&PBank Index/S&P500 has been moving inversely to gold prices since the crisis began and shows how market is pricing in the risk sentiment in two different markets.



The financial media and other market participants are focusing attention on making a bullish case for gold. When markets price in deflation expectation, gold prices are 'expected' to rise due to risk aversion and in inflationary expectation buildup it is the inflation hedge that makes gold attractive. However, gold prices have done very little to make that case for itself.

Gold prices stand at $950 at present and a blow-off rally can actually take place if investors run wild in buying all the gold they can. This might happen if gold pushes to new highs, but a large upmove sustaining its head for long looks less probable. From where the market stands, it looks an attractive counter to go short if it breaches $880 again. That would in time lead to the biggest sell-off that the current crisis has unfolded. Meanwhile, let the price resolve out of this trading band

Market Mayhem - The last breakdown !!

In previous posts I had mentioned the probability that markets were triangulating in the fourth wave of the wave 'c' decline. The S&P CNX Nifty has given a breakdown out of that range and is now set to conquer new lows. The wave 'e' of the triangle ended abruptly at the mentioned level of 2960. See previous post -

Current possibility has been thoroughly highlighted in my internal posts that market is forming a triangle which may take some more time to form. The graph below shows the current count on a one hour graph. It shows that current move is again corrective and in threes. 50 period EMA has kept price capped and the formation of 'e' in the triangle may end at 50 EMA which is currently at 2960

The triangle breakdown gives a measured move target of around 1900 levels. However from a market extension point of view there seems a likely hood that we may form a low at around 2079 - 2034 range.

The current breakdown in the market seems sharp and the index may decline strongly after testing the triangulation and giving us the point of recognition. Take a look at the graph for the current wave structure -



The current downleg in the market is largely driven by the fall in banking stocks. However stock market bottom and reversal are not congruent with a falling financial sector. This means that there is some more time left for India stock markets to reverse. The initial signals of reversal may come from an out performance in the financial sector stocks. Since we have entered the wave '5' of the down leg, there would be a lot of divergence on the momentum oscillator. The weekly structure is still trapped inside the corrective price channel. Take a look -



Indian markets might face strong selling pressure due to intense INR weakness. In the short term expect markets to take support at 2572 and 2490 levels. 2750 to 2770 remains a strong resistance range and would see a lot of selling in the market.

Intermarket Analysis

The US and other western markets are already down substantially from November lows. S&P 500 has fallen steeply and looks set to make new lows today. The Giant double top formation in S&P 500 on a monthly graph doesn’t augur well for stocks in the long term unless it trades above 850 for months.

As USD index edges up through the level of 89 there is strong wave of selling in various markets. Most of the stock market around the world has traded deep in the red today. As mentioned in the last article that gold forms its tops in the first quarter of a year, it is beginning to look that gold might actually be forming a short term top.

To come to a conclusion on any one market thorough different market signals we would need confirmation. The ‘safe haven’ bid which has been in the headlines for most part of the last six months is waning. The USD has risen in spite of a fall in the US bonds and a fall in the safe haven gold. If USD keeps its head above 89.25 on a closing basis this week, we would see a rather strong leg down in all the asset classes in the world other than bonds.

For this to happen we would need evidence that inflationary expectation is weak and is getting worse.

Take a look at the ratio of CRB commodity index to the US 30 yr bond prices.



In the previous market correction of 2000, this ratio declined to 1.4823 which is the low for the last 50 years. A rising ratio indicates the relative strength of commodity prices to bond yields. A rising ratio indicates a rise in inflation and is generally a leading indicator of inflation. Using this as a proxy for inflation expectation, there is little reason to expect that deflationary threat is waning.


Commodity prices generally lead CPI changes by a very small margin


This indicates that commodity prices can continue to remain soft for time to come and bonds are expected to do relatively well over the next few quarters. If we go back in history, the deflationary expectations usually run for 6 to 8 years. Since the fall in commodity prices is very steep we can see bouts of recovery and some volatility in the above ratio.


If the inflation expectation is very weak and markets are still factoring in strong deflationary trend then the underlying strength in the precious metal markets is nothing but a psychological euphoric buying for ‘safety’. As and when market participants start to see value in other asset classes such as equities, there would be a flight out of precious metals to equities.

In the last two articles I have repeatedly mentioned that US stocks might form a cyclical bottom in the next two to three months (may be as early as end of March). This would trigger a strong leg down for gold.

Meanwhile, the downward strength in the US markets is still unabated. Equities continue to remain a ‘sell’ unless the trend reverses i.e. the trend remains down unless proven otherwise.

Currency Markets

USD Index


USD index has broken to the upside. 89.25 is the level to watch for this week’s close. This would lead to USD index testing levels of 93 and 95 in the short term. It is important to mention here that USD is in a long term bear market and this multi year correction rally would take a lot of time to run its course.

EUR, JPY, GBP and all Asian currencies are trading lower against the USD for the last few weeks are the trend is now accelerating in some currency markets. USD index remains bullish on a short to medium term basis and will continue to remain a huge negative for Asian equity markets. Especially for a country like ours which has a huge energy import bill.

US stock market


US stocks are falling without any respite and the last few downticks have been on large volumes. This means that market remains poised to test further lows before starting to recover.

S&P 500 index would see a very strong support at 685 and 640 levels. It would be adventurous to add here that 640 – 685 might be a cyclical low for S&P 500 for a subsequent rally to 800 levels.


US Bond markets

US 30 yr Govt Bond


The US 30 yr Govt bond has broken down from the given levels in the last article. This strengthens the view that bonds made a top in December 2008. US bonds remain bearish in the short term and its long term picture is now starting to change.


Commodity Market

CRB index



Commodity prices have been rather sideways in the last few weeks. There was a strong rebound in the energy prices which led to a recovery last week. Commodity prices remain in a strong bear trend.

As mentioned in the previous updates and other view, S&P bank index is now outperforming the S&P 500. This is a telling sign that we are nearing some important support levels in US stock market.




The Amex Broker’s index has also held up relatively well and shows that market bottom signals are now emerging in the US markets.




The major theme emerging from this market scenario is that deflation threat is still strong but US bonds have started to indicate that markets are beginning to factor in some economic growth. However this has not been reflected into the commodity markets. In the short term, continue to look for weakness in the US equity markets and major commodity markets. S&P 500 would face strong support at 685 and then at 640.

Asian equity markets might break lower due to a stronger USD. Indian markets might face strong selling pressure due to intense INR weakness.