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.