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.