Munch on the credit crunch!!!

A $700 billion dollar bailout plan was on the radar screen of every investor and trader. It came and went. I was surprised by the market reaction. Bear markets have a common trait, all good news is sold into. It happened again today as well. I was speaking and expecting this from the last one week. It was very evident in the FedSpeak and ECB's remarks that all Cenbanks would ease on rates. Again the market didn't move much. Its not important to be a bull or a bear in markets. You just need to be very objective. The current bear market began with two broad important themes -

A. Inflation induced by crude, food and money

B. Stressed interbank markets due to a rise in foreclosures and rising defaults

Investment banks all over the world took a lot of risky loan assets on their books in order to sell it off in the form of CDOs and other leveraged instruments. The underlying loans assets of these instrument were housing loans. Quite a few of them were of inferior quality because banks didn't care about the creditworthiness of the borrower as they would sell these loan assets in a bundled form to investment banks. Underlying loans were quite disastrous like NINJA loans - No income, No job or Assets loans and Alt-A, subprime et al. MTM losses forced banks to raise capital which become scant as Central banks reigened in money supply to ease inflation.

Then came the headlines made famous by the financial press. Toxic debt made the issue even messier. I was quite curious to find an exact number which can define the extent of 'money' that is required to set the mess to rest. There were a few estimates. Like $1.3 trillion net of the toxic debt, $5 trillion of financial aid required, $60 trillion of gross worthless mortgage CDS and $1300 trillion mess worldwide in all sorts of loans.

I really don't know which number is the correct one. I don't even care whether any number is correct or not, neither does the guy who has put in his money in some supposedly 'risk free', 'large cap' stocks. It is quite simple and evident that the total liability of poor mortgages and inferior assets that banks held in their balance sheets is too big to be cleaned up quickly. As I picked up some of the financial magazines for the current week I noticed a glaring similarity between investor sentiment, the crowd psychology and the headlines. The businessWeek headline read - Is it safe YET? The NewsWeek read - It's not as bad as you think! and the rest. In the last one month the sentiment among the investors world over has went from bad to worse, the volumes have suffered considerably, futures in stocks are gyrating like drunkard and all of a sudden the indispensable CRUDE OIL doesn't matter anymore.

Most of us would believe or like to believe that history repeats itself. It is indeed repeating now. We are very much on the some line as we were just 100 years ago. Reading a few books about the great market crashes will let you know that the first decade of the 20th century suffered the same fate as the world economy is suffering now. JP Morgan came to the rescue then and again it stands tall though on crutches provided by the Federal Reserve and the political clout of the US government. There are quite a few articles in economist and the ET on the similarity between 1907 and 2008.

Many banks fail in every big recession and there is a massive slowdown that follows. Credit is the backbone of most business and when it dries up it leave lot of people and businesses very hungry. Currently there is lack of trust which is the life support of the financial system. Banks and other financial institutions have serious doubts over each others financial health and credit worthiness. The action of the US government by purchasing corporate commercial paper is a direct way of lending to corporates at rock bottom rates. This would provide much needed funds to corporates who require quick cash to run their businesses. It would infuse confidence in the system as well.

The U.S. Fed, ECB, BOE and other major central banks moved today to slash key interest rates as part of an ongoing effort to quell financial turmoil. I think this step is a crucial one and a number of cuts will help revive confidence in the system. Though the problem right now is not the cost of borrowing but the availability of credit. The inter bank market across the world are virtually still and there is very little activity that is happening. Still lower rates would increase risk taking capacity and help household spending and business spending in the short term.

Is the main street unaffected by the current crisis ?

If we move to look at the real economy and see what has been the past trends in the bear markets, we would notice some signals. Firstly this bear market has been in place well before the actual economy has shown signs of remarkable slowdown. Most stock indices have been cut in half and there has been comparisons drawn to 1930s. There is little by way of comparison right now. Unemployment in the US is at 6.2%, it was at 25% in few months of the bear market. 4000 banks failed in 6 weeks, 26 have failed or rescued in last one year. There was a glut of inventory, which is quite low at present. To top it all in present slowdown, each commodity has seen a rise in demand in the last one year. So real economy has not suffered as much as the financial part of it due to faulty troubled assets. But it will show signs of slowdown in near future which would be much more visible.

I think its pretty outlandish to think that the real economy doesn't undergo a slowdown if banks fail. It is for sure a hit on everyone pocket as growth slows and wage and price inflation fades. It leads to stagnation or low growth in the standard of living. The current crisis is a mix of things.

A. It was created by cheap loans to people who could never repay. These loans were bundled up as 'assets' and sold to the smart money as high yielders. Some banks were actually trading even the bundles.
B. Inflation forced the central banks to raise rates, which stopped the vicious circle of cheap credit ballooning asset values beyond reason.

C. The world grew 25% more in just 10 years. World population has accelerated to 6.6 billion. One out of every 8 person on earth is an Indian, and 1 out of every 5 is a Chinese. Indian economy grew at an average of 8.5% in last three years and Chinese economy grew at 10.5% for the last three years.

Now the question to most of us right now ( it is actually always the supreme question) is - Where are we headed ?

Stocks indices have come off their highs in a gradual manner which has been steep for some markets like shanghai. There has been a conscious effort from central banks to help stabilize the financial markets, especially from the US, EU and Japan.

In purely technical analysis terms there are very little signs of trend reversal yet. Though my studies say that we are very near to end of price corrections or probably a bear market low. It might take the market some time to recover but the price correction might get over in few weeks time. In my previous posts I have mentioned the fall in Nifty as to be an important part of the bear cycle. All upmoves have been counter trending and surprisingly very short. Threre would be more counter trend rallies unless we have a set low in place. For that to happen we must have some price pattern which hints ate it. I think it is getting formed in the daily graphs of most of the Asian stock Indices.

Talking about levels I feel 3370 should not be broken on Nifty on a daily close. If we close below that level, we will get into further price deterioation.

I will post graphs on Nifty with the wave count. Gold elliott wave count has served quite well in the last 6 months and the current upmove its getting stronger by the day.

I would be posting regularly in the next few weeks.


Sahil Kapoor

Comments are welcome.

Gold update

I am posting along term analysis on gold here. Hold has turned up precisely from the level $734 and that was a significant support as I mentioned it in my last post and some comments. There is really nothing great to trade in gold but to wait for volatility to subside.

Have a look at the following graphs:






Gold price volatility is at its near peak with implied Volatility touching 55%

Gold price has been hit hard by the credit crunch as it plummeted 30 percent from its peak

Bid for safe haven has ignited interest in gold in the last one week

Physical demand is outstripping supply as investors lapped up a record 50 tonnes of Gold ETF in just two days


US CPI rising at more than 4%

US PPI rising at double digit rates

Failure of banks and unprecedented infusion of funds from central banks have made gold even more attractive

Central Banks have pumped in a record $518 bns to curb credit crunch apart from the funds extended towards ‘bailouts’

Liquidation by long only funds due to credit crunch has undermined the safe haven appeal for gold




Gold prices to begin the next uptrend if low of $734 holds

If prices breach $734 on a weekly close, gold prices may tumble down to $640 or lower

Next up move to be laboured

Gold may rise with a rising USD in the next up move

Higher energy prices are here to stay in the long term

Gold and silver price moves are not confirming the uptrend

Next up leg in precious metals would be widely participated but volumes would be less

Inflationary pressure would remain strong as rise in money supply would keep all currencies under pressure

USD and gold may rise together in the next few quarters

Market Mayhem - Bears knocking, will the door open??

Looking at the ominous price patterns that are forming and Nifty plunging by the hour, there is little that an optimist can think off. Though there is a sense of tiredness in the current market move, the downtrend has gained strength. In my last post I suggested that current counter trend rally may move towards 5000 levels and I still believe that it can.

Firstly, form a market structure point of view, we are in a fourth wave correction of the primary upmove. In the substructure we have already formed the first leg down i.e. the A of the corrective ABC pattern. Currently we are in the B wave of the corrective ABC, 3 wave, pattern. Since wave B is also the correction of the downtrend it always happens in 3s. Take a look at the graph -



Now the wave 'a' of the current wave 'B' was in three wave. The wave 'b' of the larger degree B is in progress and there is a formation of a head and shoulder pattern in this wave. Looking at the price pattern I feel market may test 3950 in a hurry if it closes below 4200 on a hourly basis. Most of the downside will be quick and there would be little to hold on when it reaches that bottom.

Looking at the macro picture, the markets are still pondering on to the question of inflation and its impact on India Inc. There has been an incessant decline in INR against the USD. The end of INR weakness is now near. INR may have bottomed out on Friday itself and from here it can only appreciate if it is able to hold onto the 46.2 against the USD. Inflation picture would have been much better had RBI intervened on time and raised rates quickly.

Continuing where I left writing
As my computer broke down after the last para I now see markets trading just above 4000 levels. Expectantly markets have bounced off taking a support at 3955. I feel we may have formed a bottom for the current year or may be the next few months. Although there is a lot of bad news out there, still the pattern says we are at the end of wave 'b' of the higher degree wave B. Hence we begin the strongest upward path to 5000 levels from the lows that we make in the next few days. The important resistance which would see a lot of overhead supply stands at the neckline of the head and shoulders pattern at 4235. I don't see any major trigger for it right now. I feel FOMC might pop up a surprise and bring some 'good news'.

If we look at the price patter closely we have some important things to see.



The measured move of the head and shoulders pattern stands at 3735. It means market can make a new low before rising. This is also in line with the Elliott wave count which suggest we should be forming a flat or an expanded flat as the corrective abc is taking shape in 3 wave pattern i.e. 3,3,5. Now when I say we may form a low this week, I am taking into account the market picture that two of the largest banks have gone to the dogs and there is little respite to the oil bulls. The time is also set for Indian stocks to start rising with oil for reasons which I will write in the crude oil update.

I think we are entering last few weeks of short term downtrend. This doesn't mean we are entering a long term bull market from here but just a strong counter trend rally to the bear market. Revisiting my long term count on Nifty I see another fall in stocks from levels of around 5000 to 5500. This might take a lot of time to end.




News from the western markets in increasingly bad and there is lot of selling in banking stocks across markets. There are very few buyers in the market. The so called large investment banks, who for centuries have been or have managed the 'smart money' is the target of selling this time. There are other few issues as LCH clears Lehman brothers a defaulter. Once markets digest this news there would be some sanity. As of now there is chaos and selling.

Sahil Kapoor
Comments are welcome

Elliott Wave Count on Gold - VII

. . . . . . . . . Looking at the current price levels, $800 and $790 looks important pivot levels which would lead to further buildup of positions in the gold markets. I feel a material damage has already been done to the market as we enter the 'official bear market' in gold . . . . . . . .


http://sahilkaps.blogspot.com/2008/08/elliott-wave-count-on-gold-vi.html

Gold prices have been glued to $790 to $820 range for the last one week. Price action has been very volatile and there is huge participation from bears and bulls at pivot levels. Indian spot markets have witnessed huge demand from jewelers and rural demand due to a good monsoon has been on the higher end. Gold prices have not fallen for the past two weeks in absolute terms. Although the financial press have been writing the significance of a fall in USD supporting gold bears but there has been no absolute change in gold price. USD as measured by the dollar index has risen from a meager 73 to 78 and there is little fall in gold prices. Gold market does not follow USD in lock step but it is largely the sentiment which drives it.

In the long term, Euro is expected to test 1.25 against the USD. It sounds quite outlandish but the charts are looking very weak and USD uptrend is gaining strength. In the very short term, like in the next two to three weeks, euro may rise to 1.46 or till 1.48 as it is heavily oversold.

Let’s look at the price pattern in gold closely



Price pattern are getting into a trend defining range of $790 to $840. I feel a more realistic range in $865 to $790. This range would be a trend defining range for the rest of the year. If prices are able to rebound from this level and move up, there would be an upside to $865 and beyond but this upside would be corrective in nature. The medium term trend has turned down and as I wrote previously the next realistic target is now at $716.

Trading is nothing but weighing the probabilities and being on the most probable side of the price action. As of now gold prices are giving little cues. The best trading setup which is visible right now is to trade a break below $790 or wait for a selling level of $840 to $865. Buying is fraught with risk, but a sharp rebound will make people get up and notice the momentum.



The short term count on the Elliott wave analysis shows a downward five wave pattern which would mark the end of current bearishness and the end of the long term corrective fourth wave. At present we are beginning wave 5 of the downward 'C' wave of the major 4th wave. The above graph shows the possibility of prices plunging to $716 in the next 6 weeks or so. An alternate count will create a scenario for prices to rise to $865 if gold is unable to trade below $790.



Long term Elliott wave count is resolving towards $734 which marks the 38.2% of the primary upmove. Gold market is in a secular bull trend and the current medium term bearish price moves will get exhausted at this level. Price have already fallen below the four year trendline support and another fall below $790 will make $734 a certainty in the international spot markets.

There are three scenario to trade as of now. First is to trade a break below $790. Second is to sell in a range of $820 keeping $827 as a risk level and last to wait for $840 - $865 to sell.

September is the month when USD rebounds and forms reversal and we might have already formed one. Euro may rebound to 1.46 and we should be sellers at that level targeting 1.34. Interesting price action is coming up in precious metals but energy might disappoint trend following traders for a while.

Sahil kapoor
Comments are welcome

Market Wrap

Last two weeks have been highly volatile. All markets saw huge two sided moves as participants faced quite a few economic reports. US jobs picture deteriorated further and there is little evidence of a rebound in the economic activity in the near term in the US. The USD has rebounded against all majors as it is now better to own US$ than other paper currencies.

Economic scenario in western countries looks quite weak and Asian countries have already suffered due to poor western demand for goods.

Energy prices have declined significantly and the trend looks quite bearish in the medium term. Short term trend in precious metals and energy have already seen oversold levels.

Equity markets here in India have been quite volatile and there are signs of short term bottom being formed in S&P CNX Nifty.

I will be posting individual analysis of various markets in the next few days.