Indian rupee

After spending almost 3 months consolidating in an unusual “low volatility” trading range, the dollar may be headed for some swift moves ahead. The RSI indicator (in pink) given in the lower ender of the chart pasted above has broken the falling trend line to the upside. This kind of a breakout in an indicator presages that price too will break out in the same direction – meaning $/inr will break out of the triangle pattern towards 47.50
47.50 is critical as a sustained breach of this level will see the rupee trip all the way towards 48.80-49.
The MACD indicator also supports the view that momentum could be building in favor of the dollar.

DOW JONES INDUSTRIAL AVERAGE

The US benchmark index-Dow Jones – one of the best barometers of business confidence is showing signs of topping.
The chart pasted above reflects that the multi month rally that began in March 2009 is losing steam as a clear sense of exhaustion seems to be settling in. Price action has formed a classic “head and shoulders” pattern and this in itself is one of the most reliable topping patterns in charting analysis. This is significant because we could see the Dow head towards sub 8000 levels by March 2011.
This in turn would imply that the US economy would likely face renewed headwinds and thus be weaker in the next FY: 2011-12 , causing risk aversion and volatility to soar . If the past is anything to go by, we should see the dollar rise in response.

Market Outlook

EURO The euro may be nearing the end of its corrective bounce – a near 11 cent rally from its recent lows of 1.1876. Euro gains from hereon are likely to be limited by the resistance zone at 1.31-1.3170.
In any case, unless it manages sustain a convincing breach above 1.3326, the bias would still be tilted towards euro moving lower again.
The region between 1.2570 to 1.2250 would be the likely testing zone after this up-move is over.(medium term target)
The long term target (if 1.3326 is not breached) would be 1.1640
STERLING
The outlook for the pound is quite mixed as it hovers about the 200 day EMA.
The currency faces a strong resistance zone between 1.53 and 1.55, failing to breach which could trigger another round of selling towards 1.4750-1.48. USD/INR
The currency pair is seen consolidating in a tight range and since any consolidation is a precursor to a breakout in volatility, the dollar may be head for some volatile swings going forth.

Consistently trading above multiple moving averages suggests that while some correction towards 46.50 support cannot be ruled out, so long as 46.30 is held, the bias would be in favour of a stronger dollar.
A breach above 47.50 would trigger a move towards 48.50-48.80 SENSEX Indian equities look very ripe for a good corrective fall as price action shown in the chart above is about forming a triple top pattern which typically is a bearish alert.
Inability to trade above 18000 is in itself portending a break below the trend-line (in blue) .A convincing breach below 16700 would confirm the negative view and could take the index all the way down to 14000 levels.

Is it time to Buy the most battered currency …??

With sentiment around the European major bleakest since the time the French and Dutch voted a historic “No” to the EU constitution way back in May 2005, it just may be time to buy the euro as the environment seems perfectly ripe for a surprise rally in the currency pair.



The four hourly chart above clearly indicates divergences, suggesting that the euro may be gearing itself for a relief rally.

From an Elliot perspective the wave counts also suggest that a corrective wave may be around the corner .



If the above wave - count is right and the wave (3) is done with, then euro may be gearing itself for a the 4th wave corrective rally, which in turn can be expected to unfold in a 3 wave fashion. The target zone could be anywhere between 1.2775-1.2990.
Post this corrective bounce, euro could fall to a 1.16 to complete the 5 wave sequence Therefore, this rally can be used to sell euros for the short term.

Has the rally run its course...?

Just when the dark memories of Lehman began fading into a so called “abyss of no return”, I’m impelled to wonder (notwithstanding the breathtaking rally mustered by the DOW ), if the next BIG Man named Goldman isn’t taking on the baton from where its former counterparts left….

……….To take Uncle Sam to revisit the troughs seen in economic activity not so long ago through a prolonged process of what may be called a ‘double-dip’ recession.
Take a look at the chart below.




The Dow Jones, from its lows in March 2009 has retraced a whopping 60% of all losses seen from the peak at 14,000. And this level assumes significance simply because it corresponds to the 61.8% Fibonacci retracement level.
While it may seem a no-brainer to expect a good correction in the Dow from here especially given the relentless rally and massively overbought levels that it has been trading at, a closer look at the rally suggests that the rally has unfolded in a kind of 3 wave pattern.
And this has serious implications in that, if the Dow does not manage to hold above the 61.8% Fibo resistance, then the path of least resistance for the US stock markets would be down for an extended period. That is to say that what we just witnessed the whole of last year – a surging Dow was infact nothing but a BEAR in a bull’s clothing….
Since a 3-wave pattern is typical of a corrective phase, the original trend (namely down) will resume in the Dow Jones. I’ve pasted the price action in euro to highlight the typical nature of a 3 wave pattern.




(As can be seen the euro plunged initially, and then managed to recover in a 3 wave fashion which finally resolved into the previous trend again.)

If the above is true then while this topping of the markets unfold, US will continue to print upside surprises in economic data, hoodwinking many if not most to believe and be convinced that the economic recovery is on sure-footing. And this in itself is the danger because even the last time around, while the markets numerically topped in Oct 2008, the impact on the real economy was felt much later by Feb –March 2009.
If this is anything to go by, then the US economy will most likely be weaker 7-10 months down the line with another round of bankruptcies and collapses to its credit. Conserving cash would be prudent as typically this asset tends to reign as king in such times.

Market outlook

EURO





As can be seen, euro’s decline has clearly traced out an Elliot 5 wave pattern .If the above reading is right, then euro could be bracing itself for a 3 wave corrective move – a sharp rally that could take it towards 1.4060. In any case the corrective rally is unlikely to extend above 1.4160-1.4250.


Pound




Closely following its European counterpart, the sterling may also come in for a relief rally that could potentially see the pair back towards 1.5950 to 1.6060.

Since the overall bias is still tilted towards bearishness, gains are unlikely to extend above 1.6170 giving opportunities to sell the pound there for the next thrust down towards 1.49-1.50

Only a break above 1.6350 will negate the above bearish view.

Dollar Index





The dollar index is likely to take a breather after the much awaited rally. Can expect the index to fall back towards 78 -78.50, but is unlikely to fall below this level. The 200 day (black line) and the 100 day (green line) Averages are expected to lend terrific support for the index and usher in another strong bounce for the index.

This impending correction in the dollar index is likely to be accompanied by a rise in risky assets. One can expect Indian Equities - Sensex to retest 17,100 before correcting down again. Gold also could evince renewed interest during this period of dollar correction towards 78.50.


Indian Rupee





The dollar/ rupee pair tested the critical 46.70 – 46.80 territory and has currently slipped below 46.30 again. While a test back to the support territory of 46 is imminent, the outlook is slightly mixed, with budget around the corner and therefore only a break below 45.96 should invite fresh re-entry of selling.

Sustained trading above the falling black trendline would be needed to signal that the dollar is finally out of the woods.

Market Outlook

Sensitive Index



The much awaited decline in the Sensex has finally occurred. As can be seen, the entire uptrend that started from March 2009 stands violated. This is not to rule out spikes, but any spikes from here are likely to be limited initially by the 100 day EMA (purple) (currently at 16,604) and likely to take further resistance at 17,200. In any case, price action is not likely to immediately move above the trendline which it broke.


This corrective move isn’t yet over and should resume in a 3 wave sequence – which means any rise could pave the way for a deeper decline towards 14,000 first and then a 12,800. The chart below shows the Fibonacci retracement levels. The 50% retracement level is popularly known for being an 'inviting testing ground'



These levels therefore, will need to be tested before one can clearly say that the corrective decline is over. So for the short term investor, the strategy should tilt towards “sell upon rises “rather than “buy upon dips “for the short to medium term.

For those looking to invest for far term, the decline towards 12,600-13,000 can be seen as reasonable entry levels for a 2-3 year timeframe.

USD/INR




Closer home to our domestic currency, the obvious/ instinctive conclusion or expectation would be to see the rupee weaken in the face of stock market declines.

However, the rupee may still hoodwink the majority and manifest its weakness with a lag or delay. In any event, a break above the falling trendline (currently at 46.80-47) would be needed to signal that the dollar is ready to stamp it’s surreal strength against the rupee. Until then, it would be safe to cautiously sell upon rises for nothing more than 6 to 8 months, notwithstanding the plausible negative MTM’s that may begin to rear its ugly face.

Partly because the kind of divergences playing out in the MACD suggests that the current bout of rupee strength may not last indefinitely throughout the year. In all likelihood, there will be one massive show of strength by the dollar probably in the second half of 2010.


GOLD




Gold currently stands at a critical juncture – a few dollars short of the rising support trendline that has withstood downside attacks throughout the upside seen since late Nov 2008. Gold faces an extremely critical challenge of 1070-1080 – for any break below this support region would see dollar bulls charging in causing gold to decline to 970 to 990.

It is likely, given the oversold parameters on the dailies, that gold may evince some interest at the current levels and move towards 1120-1130. But unless, it breaks above 1150 convincingly, the bearish undertone may resume taking gold below the trendline.


OIL



The fortunes of the Middle east may be coming to an end for the medium term. Oil has made an interesting development in the past couple of months.

In the above chart, one can see that after breaking below the first blue trendline, price rallied back above the trendline swiftly to confound many an oil bear. However, it whipsawed about this line and currently stands at 74.

Oil may infact see a rally in the very short term that may not extend too much beyond 80-82. After which, in all probability, oil in the medium term is more likely to be headed down than up- thanks to the divergences displayed by MACD. Break below 68-70 support would serve to cement the medium term bearish expectation.

Market Outlook

Dollar - Rupee



The rupee’s resurgent rise in the New Year came as a nasty surprise given the overall dollar bullish undertone overseas – it’s breach below 45.80 - 46 is indeed an important development as we sit to reassess the trajectory of the rupee going forward.

As one may notice in the chart, price has been forming newer lows (purple line), as it remained well below the falling trendline (black line). So long as the purple line stays below the black falling trendline, any strength in the dollar would meet with selling pressures.

However, any rally from here that stages a convincing breach above the falling trendline (now at 47.10) would spell an important alert – that of a reversal in the falling trend of the dollar. And in such a case the dollar would rise to nothing less than a 49.00

But so long as the purple line (price) keeps holding below the trendline, it would be prudent from a risk management perspective to sell upon rises. In other words, if the dollar does not cross the first horizontal dotted line (at 47), it open’s the possibility of a test of the third dotted horizontal line, namely 44.10.

So given these contrasting possibilities, it may seem pretty much a Catch 22 scenario of “Doomed if I sell, and Damned if I Don’t”…..

My sense is that we could play safe for the medium term by resorting to aggressive hedging upto say August –Sept 2010 to guard ourselves against the risk of a 44. Beyond August – Sept 2010, hedges could get concentrated in the plain vanila space for the simple reason of minimizing adverse MTM’s and participating in any dollar strength that may materialize as the year progresses. Because given the timeframe, namely between now and August 2010, one cannot rule out a massive comeback in the dollar either.

My personal view is that rupee’s strength could be limited to the near to medium term and after a possible move towards 44 or below, a sharp rise (like that seen in 2005 and 2007 ) in the dollar could materialize that could take the dollar back to 48.60 - 49 again. Conservatively speaking, the likely range of the rupee in 2010 could be 43 to 49.50.



DOW JONES



At the risk of sounding like a broken record, I believe that the recovery staged by the Dow Jones Industrial average may be close its end and that the fundamental trend of the DOW is still down.

As the index approaches a key Fibonacci retracement level as shown by the blue horizontal line, the US markets may be in what can be called an “ exhaustion rally ” - one that typically precedes major turns.

Key bearish divergences – in MACD and RSI are playing out – as can be seen, with every new high made by the DOW, the indicators – ( MACD & RSI ) aren’t making corresponding new highs.


If one were to trace the rally that started off in March 2009 in the markets, the economy has started showing signs of recovery now ( after nearly a 9 month lag ). If the above view of a bearish DOW materializes, then the US economy in the next 9 to 10 months is likely to be slower than what it is now.

It may be worthwhile to keep our revenues from US clients covered through a credit risk cover just to be guarded against a worse case scenario of bankruptcies and defaults.