Euro setting for a short

EurUSD has rebounded from lows and looks like its forming the corrective 4th wave. Graph would tell you more. Take a look -



1.3380 to 1.3450 looks a good level to go short. Hourly candles have formed a gravestone doji. can keep a s/l above it. Daily graph is looking strong though. Short trades should be swift to cut above 1.35.

Market Mayhem - Triangle formation

The S&P CNX Nifty corrective pattern of the fourth wave which was expectedly forming a triangle is now in mature stage of formation. In the last update I had called for a 1000 point rally from lows of 2500 and market retraced the advance from 3147.

Current possibility has been throughly 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.







Weekly channel is holding strong for the time being and looks to hold the price in it.



Point and figure graph shows strong support at 2489 which can lead completion of wave 'd'.



Momentum studies are weak and TRIX is also breaking down pointing towards further downside in days to come.




Look for prices to give a rebound to complete triangle by forming 'E' at around 2950.

Crude oil Wave Count

Since crude oil gave a breakdown below the expected tip of primary wave 1 the wave structure has changed dramatically. Long term price damage to crude oil prices is extensive and can lead lower prices over the next few years. Take a look at the current 'altered' wave count for crude oil -




We are now in the first leg down for crude oil. The current move is the wave 'A' of the ABC decline. The lower degree wave 4 ended at level of $25. So it is possible that crude oil prices might decline to this levels before the next bull run emerges. The short term for oil price is looking much more promising. In the wave 'A' we have already formed the wave 3 low and are possibly in wave 4. Take a look -



In the very short term crude oil may reach the expected target of $55 if it is able to cross $46 on a daily close. $38 should serve as a strong support.

For previous posts and analysis see this link - http://www.sahilkaps.blogspot.com/

Dollar Index - show of strength

USD index has strengthened again against all the major currencies. The expectation that ECB will cut rates more than previously expected led to strength in US dollar.

I am making a slight adjustment to my previous wave count. I think the intermediate bottom in USD is now formed and it can move up strongly from here. However current wave count would need a revision should the USD index trade below 79. On the whole USD index might touch 100 levels in next few months. Take a look at the graph.



The US credit markets are showing signs of easing.

The tight liquidity conditions in US credit markets are easing. This is evident by the fall in TED spread. The TED spread is the difference between the interest rates on interbank loans and short-term U.S. government debt ("T-bills").



Issuance and total outstanding issuance from financial firms are also rising pointing towards easing up of markets.



This augurs well from general market conditions on the whole. Equity markets have been under tremendous selling pressure. A rebound in equity along with a rise in bond yields may give some positive signals about the underlying strength of the market. However there is no such signal currently in the market.

Elliott Wave Count on Gold - IX

Lets put the above picture in perspective. In the last update I mentioned that gold has formed an important resistance at $880 to $900 range. Though a severe break came just after the prices declined below $820, it rebounded with strong momentum to $890. I was quite surprised by the upmove in the market and there was hardly any indication of what the wave 'c' was unfolding into. Now with new data coming in I feel gold has formed a potential ending diagonal pattern in its wave 'B' of a double zig-zag ABC. The wave 'c' of higher degree wave 'B' has unfolded into a ending diagonal pattern. Ending diagonals generally lead to severe price movements in opposite direction of their formation.

In the past, this pattern has been accompanied by a double top or a head and shoulders pattern formation. Currently gold will form a head and shoulders pattern on a daily close below $828. A measured move can be targeted to $780 and downwards. However if this market shows weakness at $790-$780 range there is a potential of further price declines to about $640 and $490 over a period of few months.

Gold has performed quite well in these uncertain times but has not created price appreciation benefit for investors. In the last few quarters the inflow into Gold ETFs, coins and bars have reached historic highs with spot price premium hitting new highs. But gold prices have failed to move up even to $900 and above. This points to a heavy selling that is persistent in the market.

As of now gold looks weak and this would be confirmed when prices start trading below $828. However, high volatility is still present in the market with 20-ATR still at 26.4 level. Next two weeks would be crucial for gold price movement.

2009 - Year of expectations!!!

Happy New Year to everyone. 31st December '08 gave me a feeling that finally the year is coming to an end. 2008 has been the worst year in living memory of most people. Some might argue that things can't get worse than this, but there is lot that has to be seen before we come to any conclusion. Lets just see what was good about 2008 -

• India did relatively well in Olympics 2008. We saw some new heroes emerging.
• Indian sports in general was very good. Golf, badminton, cricket and football had a very good year.
• Central government survived a confidence test vote
• nuclear deal - (long term impacts still in question)
• Launched Chandrayaan-1 from Satish Dhawan Space Centre, Sriharikota

and some other that I might have missed.

what did an average defensive investor gain in 2008?

• Stocks became cheap (after eroding much of the gains seen in the last three years)
• High rates on FD for long term investments, still available
• Better home prices

There were some unprecedented and mind numbing incidents that happened in 2008 which took everyone by surprise. Worst was the attacks in mumbai. Blasts in various Indian cities and many stampede which caused huge loss of human life.

In every sense the year gone by has been quite a shocker to most of the financial gurus and practitioners too. No one in the world ever imagined that oil would fall more than 80% from its peak in 5 straight months. Stock markets recoupled after failing to decouple and created a panic amongst investors.

Lets put things into perspective as the stand today. I would look at financial markets as this blog is about the markets.

First of all there has been some serious breakdown in intermarket correlations. In the last one year stocks and bond prices has moved in opposite direction. (Generally rising bond prices indicate lower borrowing costs and a positively sloping yield curves' presence leads to a rally in stocks, so bonds and stocks are positively correlated). Bond prices across the world first fell remarkably and then started to climb incessantly. Meanwhile stocks remained resilient initially and then sold off as bond prices started rising. So a serious correlation was interrupted.

Secondly, bonds and commodities showed a clear correlation as commodities fell and bond prices started rising. There was a one month lag in bond prices in some countries like India, which is good.

The US dollar gained 17% in last quarter or so. This lead to a fall in commodities which is also a perfect correlation. But a rising USD is in general good for stocks which didn't happen in 2008.

To summarize the correlations -

1. Stocks are bond prices are positively correlated, bond prices (note: bond prices and not bond yields are mentioned here) lead stocks in both bear and bull markets.
2. Bond prices and commodity prices are negatively correlated, commodities lead bond prices by a small margin.
3. USD is inversely correlated to commodities, its leading characteristics have not been very strong.
4. A rising USD is good for US stocks, but not essentially for other markets like emerging markets in general (domestic currency strength is actually good for other markets barring few exceptions like China).

Now this creates a question that why then stocks didn't rally as borrowing costs came down. The answer is the deflation expectation. Markets have been frightened by the expectation that price level would eventually fall so much that prices of goods and services would start falling year on year atleast for a few months. This was very evident from a number of factors. There was massive risk aversion in 2008 as bond price rally lead to yield going to zero for US3 month Treasury. The yields on High Yields (Junk Bonds) started rising and some were quoting a yield as high as 56%. There was a massive sell-off in consumption commodities like copper, platinum and agricultural commodities due to a severe fall in employment.

So what do we 'Expect in 2009' ?

All previous financial crisis like 1907, 1929, 1930, 1970 lead to severe legislation's in US. Like 1907 led to the creation of Federal Reserve, 1929 lead to SEC, 1970 lead to another set of regulations for funds. In India previous market sell-off has led to more regulations like crisis of 1992 lead to the creation of SEBI, then the scrapping of badla system, depositories etc. So its very important to be prepared to for regulations and see how the markets react to them.

Second is to judge whether the worse is behind us.

The US economy is weak and will remain weak for some more time. Unemployment in US would rise to levels of 8% or more, some more banks may fail. Currently following banks have failed. Click here for list of failed banks.

Imports in the US would remain low and western demand would remain sluggish. Some sectors like auto, housing and retail would suffer further damage due to a fall in demand. All these factors are well known now and markets have priced in most of the bad news already. As I wrote previously that reversal signs have started to emerge and we has quite a rise in the world equity markets post November. In fact Indian equity markets are also showing signs of resilience as Nifty is already up around 600 points from where a 1000 point rally was expected. See previous commentary.

The current market scenario shows that markets are indeed rising with some backing of improvement in market sentiment, flows in the credit market and a rising expectation of economic growth. One of the most important indicator that should tracked now is the long term bond prices. Since markets have started pricing in deflationary pressure than a fall in the long term bond prices will lead to weakening of the sentiment and reduced 'Panic Selling'.

2009 is the time to raise your equity weight age and reduce your holdings of bonds and debts. India FD rates are still attractive. However in bear markets there are several events that can create massive buying opportunities. One recent example is Satyam. So every major opportunity should be used to buy sound companies with 10 years of more of stable earnings and a PE of less than 15. Any event that leads to a sudden dip the stock prices of firms which are strong from a business point of view should be bought and kept for few years.

A few caveats - 2009 will bring opportunites but with large risks attached to them, so be ready to evaluate the risks before taking a punt. Inflation may rise again as commodities make an interim come back, stocks might see a final bottom in place in the US along with a relief rally in commodities. Indian markets are better placed in terms of financial health but worse of in terms of investment flows, geo-politics and the stability of the government.

In 2009

Expect cheaper goods, eating joints which increased the prices of food and edible items during last year inflation has not decreased the rates yet. This can happen in few months. Cheaper travelling, better media entertainment and better security might make your weekends.

Happy New Year