A thought!!

We suffered irreparable damage last week. That one long night stretched for nearly 60 hours before our intrepid, brave and indomitable defence forces brought a new day in our lives. Now is the time that we adopt zero tolerance towards terrorism. Its a wake up call, though a very discomforting one, for us to recognize the enemy and be alert. The loss of property can be recovered but the loss of lives of innocent people will remain with us always.

In this hour of self introspection and action for the country we shall remember that our will to achieve our goals and march forward will never die. This poem puts it beautifully.

Jai Hind

Elliott Wave Count on Gold - VIII

I have maintained my bullish outlook in gold for quite a while. In a presentation this year I expressed the view that gold price would rally to $1200 along with the rising USD. Since September gold is up nearly 12 percent and USD Index is up nearly 13 percent. Though both the markets have behaved in an expected manner, the volatility has led to very little trading being profitable. Overall I still feel that the major trend for gold has still not ended and it is resolving into a much stronger trend for a larger time frame.

In the last one month gold prices have rallied up from a low of $680. Elliott wave analysis in gold has given quite a few counts and there is a possibility that we may seen one more low before the next move up.

In my previous post ( Gold Update ) I mentioned that we may have seen the low of $734 as the important bottom in gold. But as mentioned gold prices closed below $730 and made a low of $680. The rise in gold prices which took markets up to $934 came in three wave and the next fall was also in three ways. Take a look at the graph -

In my view a major bearish pattern has been formed at $935 and unless prices go above $950 this latest count will remain my most probable count. On a weekly graph the gold price count looks like this -

We are currently in the 'C' wave of wave 'B' of the second ABC zig zag in gold. The USD has broken down and gold prices have been moving independent of this fact. Any major reversal in USD can lead to severe weakness in gold prices. USD has entered a strong upmove and has formed a bottom for this decade. Long term trend in USD is decisively bearish and in gold decisively bullish. Medium term trend can see the reversal of trend. I am writing this at a point where gold prices have shown immense strength. From a market sentiment point of view I think all market participants have become bullish.

Huge volatility in prices is generally a sign of market weakness. Gold has seen huge amount of buying from a lot of investors and amid the 'Financial Armageddon' gold prices have failed to make a new high. Overall I feel gold prices would find a bottom at $550 if they are unable to hold $640 on a weekly closing basis. On a relative comparison basis gold would be a steal at $600 range for the long term investors. My long term targets of $1200 and above remain the same. But prices need to resolve meaning fully to reach these prices.

In the very short term prices face immense resistance at $832 and $854. If prices close above these levels gold might rise to $880 to $900 before falling to sub $700 levels. I feel any bearish pattern at $850 and above should be used for initiating a bearish price objective on gold.

Market Mayhem - Trend

Previous market alert

Long term

Long term trend in Nifty remains bullish until prices remain above 1200. We are in a corrective 4th wave of primary uptrend. Current price move can be divided into 61.8 and 38.2 of the entire move. Currently Nifty is trading below 61.8% of the entire motive wave. The lower degree fourth wave ended at 2600 and Nifty has bounced back twice from the same closing level.



Medium term

The correction that began in January 2008 is unfolding into a Zig-Zag. The current move is the wave ‘C’ of the corrective Zig-Zag ABC. We have already formed wave 3 of wave C within ABC. The corrective channel formed in May is still holding the price with a one week aberration.




Short term View

We remain in corrective short term abc of down 5 wave impulse ‘C’. The corrective wave ‘a’ and ‘b’ have ended and we entered the wave ‘c’ on Friday. This may take markets up to the 3500 to 3700 which is the termination of 4th wave of one previous degree. Markets would eventually make a new low before the current down trend ends. An alternate count exist which shows that market can make a new low if it falls below 2490 in the next one week. On a risk reward basis, it would be favorable to go long with a risk level below 2490 for a sharp upward rally. Markets may test level of 2630 in the next few days before the next rise.


This count would have to be reviewed and adjusted if market closes below 2490 in the next two weeks.

Is the trend tiring

The USD index which gave an important breakout a few days back has seen volatile moves in the last few sessions as it flip flopped between 88 and 87. The break to the upside should lead to significant rally in the next days or trading sessions. If it is able to trade above 88.2 there would be a strong rally in the USD index to well above 90.

Take a look at the graph -



For the Elliott wave count refer to the graph - USD Index wave count

It is interesting to note that the USD index which is in general positively correlated to US equities is now serving as an important gauge of sentiment. A rise in USD has been accompanied by a fall in various stock market indices in the last few weeks and a make or break day is getting closer. In the next few days either the market would test its lows and recover significantly to its major resistance levels, like 11500 for Dow Jones Industrial, 1000 for S&P, 3500 for Nifty, or it would lead to a severe price erosion. I think the market internals are pointing towards a global rally that will take all participants by surprise if DJIA is able to holds its October lows on a closing basis.

If markets fall in the next couple of days and reach important support levels, there would be good opportunity to the upside in next one month. We are entering a strong seasonal phase in the next week and this can lead to a significant rally in the markets. So buying on any dip with October lows as risk levels may serve very well.

Market Mayhem Alert

Nifty may bottom out between 2540 and 2640. The 'c' of wave 'B' of corrective ABC is in force. A possibility of a 1000 point rally would be strong if market falls and recovers from the above said range. Risk would be a new low below the October lows.

An alternate count scenario

Elliott wave count on Nifty has been quite confusing lately and there are a number of ways to put it. As i had put up a count previously which shows we are in 'C' of a zig-zag, i see another count possible. While discussing the pattern with a friend, this pattern seems to make a better understanding of the count.

The alternate scenario says we are in a double zig zag corrective pattern. The current leg is the wave 'b' of the ABC corrective and we are forming the 'c' wave of 'b'. The current wave might take markets to as high as 3500 to 3700 and then make a new low. Which would initiate the formation of wave 'c', the final leg down of the wave pattern. Have a look -



This count suggest that it would take another 6 months for markets to bottom out if a=b in time and c equals a+b which holds true in general market conditions.

Market Mayhem - Another selling climax

US markets rebounded sharply yesterday retracing 4% of intraday loss to close 5% higher. It has formed two selling climaxes at the same price level which makes the current phase of bear run very weak. The reversal came on a day of key market turn date, a full moon ( may not interest many readers, but markets do turn and take trend on some key dates like the next one is 15 Dec 08). Looking at the graphs for DJIA it seems there is a likely hood of a rally if there is a strong follow up rally today and market rises above its immediate resistance.

Another important aspect is that we are still forming lower lows and lower highs which is not at all bullish. The bear trend is still the major trend and all the rallies can get sold into. The trend still remains down but the weakness of this trend is now evident. Today's price move is important for this pattern to unfold. Have a look at the graph.



USD index which gave strong breakout few days back has seen an important price pattern formation. A bearish engulfing at a major resistance has been formed. A follow up candle may lead to a truncated 5th wave of the Elliot wave pattern that was discussed in the last post. Follow this link

Indian equity markets have seen severe fall in the last few days. Elliott wave analysis shows we are in the smaller degree 'C' wave of the corrective 'B' wave of ABC pattern which is unfolding to take markets back to 3500. I wrote last time that markets may rise to about 3500 to 3700 range before falling again to lows. India markets may see a strong bottom in place in another quarter. This may hold true after markets rise from today's lows taking cues from overseas markets.

There are a number of indicators which show that India markets are decoupling from international markets. The Mutual fund cash ratio is at an all time high and PE is nearly the lowest for a bear market amid other important factors. As and when the liquidity crunch goes away there would be a strong investment inflow into India markets. One of the primary problems of India markets is now resolving meaningfully, i.e. inflation.

The breakout and the breakdown

USD index gave a convincing break yesterday as it closed above the triangle being formed on the daily graph. Euro pierced its triangle support yesterday and closed below it marking a significant bearish pattern which may now extend to 1.23 for short term or might stretch to 'at par' levels against the USD. Price action may see some test of resistance and support levels in Euro and USD index respectively but it may enter a strong move in few days.

Take a look at the breakout -

Price action to watch out

USD index is signalling a strong uptrend on a break above 87.15. This would coincide with a break in euro triangle. USD has been moving against the major equity markets over a period of time. A breakout in USD may lead to a severe price deterioration in world equity markets.

Have a look at this graph -



Watch out S&P 500 today.

A live triangle in the making

Take a look at this graph -



Euro may retest its lows and may touch 1.20 on a break below 1.27. All wave of the current formation are in three waves which may give a bearish break to the downside. Its wait n watch till the break comes. High risk traders might go short at 1.2940 as well.

Similar Graphs - Similar result

Crude oil, copper and DJIA gave some positive up move signs. None was able to hold to support levels and now has broken down.

Copper and crude oil has given bearish breakdowns. Copper looks set to test its lows and crude oil may decline to $50 if it doesn't go above $65.5 on daily close. Take a look -


Crude oil


Copper


Prices may see some retest of resistance levels before going down.

Three similar graphs

Take a look at these three graphs ( open in new windows separately)

Copper



Crude oil



Dow Jones Industrials



All these three graphs have a few things in common.

- MACD has given a crossover from very oversold levels.

- A double bottom is formed in Dow Jones on a daily chart, crude oil on a 240 minutes graph and copper on an hourly graph.

- Dow Jones is nearing its short term resistance level and RSI is getting into a congestion zone; Crude oil has formed a bullish engulfing pattern with a strong break on the RSI; copper HG has tested $1.78 three times in the last three days

There is a possibility of a significant rally in crude oil and copper as i mentioned in the last crude oil post. Short term resistance level of $72 was the top yesterday and $76 may see some more profit booking.

Copper is looking set to touch $2.08 and $2.25 after that breakout.

Money market conditions

In the last few months the Federal Reserve and other central banks have tried to ease money market conditions by lowering interest rates. Every country in the world is on an interest rates cutting spree.

This table shows the recent moves of major central banks.

TED spread has been seen as an important indicator of money market liquidity conditions. There is another important indicator which can reflect the liquidity conditions in interbank market. The LIBOR-OIS spread. One of the recent Fed article explains -

The LIBOR-OIS spread has been a closely watched barometer of distress in money markets for more than a year. The 3-month London Interbank Offered Rate(LIBOR) is the interest rate at which banks borrow unsecured funds from other banks in the London wholesale money market for a period of 3 months. Alternatively, if a bank enters into an overnight indexed swap (OIS), it is entitled to receive a fixed
rate of interest on a notional amount called the OIS rate. In exchange, the bank agrees to pay a (compound) interest payment on the notional amount to be determined by a reference floating rate (in the United States, this is the effective federal
funds rate) to the counter party at maturity. For example, suppose the 3-month OIS rate is 2 percent. If the geometric average of the annualized effective federal funds rate for the 3-month period is 1.91 percent, there will be a net cash inflow
of $2,250 on a principal amount of $10 million [(2 percent –1.91 percent) × 3/12 × $10 million = $2,250] to the bank from its counter party.

A bank borrowing at the 3-month LIBOR rate of 2.10 percent that enters into a swap to receive at the 3-month OIS rate of 2 percent has a borrowing cost equal to the effective federal funds rate plus 10 basis points. Entering into the OIS exposes the bank to future fluctuations in the reference rate. However, the bank can guarantee
itself longer-term funding while still paying close to the overnight rate. Because the alternative would be rolling over the funds on a daily basis at changing overnight rates, banks are willing to pay a premium. This is reflected in the LIBOR-OIS spread (defined as the difference between the LIBOR rate and the OIS rate) shown in the chart.



In times of stress, the LIBOR, referencing a cash instrument, reflects both credit and liquidity risk,1 but the OIS has little exposure to default risk because these contracts do not involve any initial cash flows. The OIS rate is therefore an accurate measure of investor expectations of the effective federal funds rate (and hence the Fed’s target) over the term of the swap, whereas LIBOR reflects credit risk and the expectation on future over night rates.


Now, the US Federal Reserve has been able to correct the yield curve by bringing the near term interest rates down. This has been achieved by lowering the Fed Funds rates but it has not been able to reduce the strain on the illiquid money markets.



US T bills have seen record inflow as investors preferred US T bills for safety of investments. Secondary market rates for T bills in US has gone below 60 year low. Have a look



As and when the interbank markets return to normal liquidity conditions there would be a huge inflow of money into other asset classes.

Crude oil conundrum

Crude oil prices have given their first weekly positive close in last five weeks. There is little evidence that the downtrend has ended but a positive bias is now emerging in the markets. We open up the next week with a new month. So there could be heightened activity in the crude oil market on Monday.

Over the years I have seen enough sharp swings in commodity markets when a new calendar month begins. There are two important developments in the long term crude oil price graph. The long term trend line has not been breached untill now and prices are oversold to the highest degree compared to last seven years. Have a look -



Crude oil prices are expected to move up to $72 and then $76. Current rebound may last till $80 and we may see some selling pressure at those levels. $63 should hold as a strong support if this upmove has to last.

Market Mayhem - Decline resolving

Equity markets have never be more correlated. World stock markets have performed equally bad in comparison to each other in the month of October. The US markets have given their worst ever October performance and there is little respite in terms of price rise as yet.

Indian equity markets along with the other Asian markets were hammered down beyond belief. The 'bad news' has started flowing in steadily now as the bear market unfolds. Equity markets would bottom out much before the real economy, as is the case with all bear markets. However there are a few important factors which are giving disturbing long term signals. The inflation expectation of the whole market seems to be one of severe deflation. The yields between regular ten year treasuries in US and the treasury inflation protected securities (TIPS) stood at an incredibly low level of 0.92%. This means the US treasury market is signaling a remarkable slowdown in price rise and in reality is pricing in a falling price scenario. If high inflation is bad, then deflation is even worse.

Another important market that is falling significantly is the gold market. Gold prices have been falling steadily since last two weeks and there is little momentum in the prices as yet. Though chart studies show $700 to be a important support level but the record rise in Gold ETF redemption's have put a question mark on the sustained medium term uptrend.

As I wrote previously that god may be starting a fresh upmove towards $1200 mark if it doesn't close below $734 on international spot markets. I was wrong on that part as it closed below $734 yesterday on a weekly basis. Now the important thing to notice is if the inflation expectation in the world economy remains so weak as they are right now, there is little incentive in holding gold in the medium term. The Elliott wave structure suggests that prices can decline to $544 before basing out.

The Indian equity markets have seen a big slide in prices. Price deterioration has been steep in all Asian markets. Indian markets performed badly in the month of October. From a valuations point of view the markets are in a screamingly valuable zone. These prices are suitable for long term investors to make portfolios. Looking at price graph for Nifty it seems the current uptick will eventually get sold into. Have a look at the revised Elliott wave count.



As I mentioned previously that we are in the final leg down of the bear market which began with a decline from Nifty high of 6357.

The first leg down which ended at 4448
Second leg was a counter trend upmove which ended at 5299
Third leg is the current move which has extended down to a low of 2253

The current fall i.e. the third fall is nearly 1.618 of the total downward move of the first fall.

From the current price levels a further upmove to a range of 3500 to 3700 can be expected. Since we are in the fourth wave of the decline of wave C it can end at the termination of the lower degree fourth wave which was at 3780. There any move to that level may get sold into and then the final leg of the current decline will begin. Nifty has seen a selling climax and final downward move may be truncated and may see formation of a bullish contracting triangle. The fall from 3500-3700 range will give one of the best opportunities in decades to buy into the Indian markets.

It is important to note that we are nearing the 2010 deadline of the kondratieff wave for which Nikolai Kondratiev was jailed. According to his analysis the credit cycle would bust by 2010 and leverage would come down to 10:1 as compared to 40:1. We are indeed working towards that level.