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Inter Market Analysis

Inter market analysis is a series of articles studying related segments of the market to identify lead lags between trends in each segment. This can often forewarn you of impending changes in trend and allow for planning of required action based on it. For example midcaps v/s large caps, currencies v/s commodities and US markets v/s European markets and so on. In a global environment inter-market relationships are not restricted to a country but between countries and their respective asset classes as well.

Volatility Breakout

This chart was created right before Brexit to judge if the same pattern was going to repeat, as both the Brexit and Grexit events were in the month of June, and the last week of June. What followed was a drop and another explosion in Volatility. In 2015 it occurred two months later in Aug 2015. This year however it has taken longer and a similar descending triangle formed that broke on both occasions. On Friday as VIX broke out of the falling trendline of all the previous highs the Dow broke down and closed below the descending triangle. The last time it was followed by an immediate crash. Lets see if the same follows over the next few days.

vix071116

US 10 year T Notes

US bonds saw the Daily sentiment index drop to 10%, meaning 90% of advisors polled were bearish. A near extreme. The daily RSI shows a positive divergence and the fall so far is 3 waves and can be marked as a-b-c- complete. So on weekly charts I can come up with this. Wave D complete as 3 waves down and another leg up in wave E up starts. This could be very bearish for the dollar and bullish for commodities especially precious metals. However I do not know what it can mean for equities. Maybe short term positive as it eases the pressure on yields,

bonds-021116

However bonds and US equities are  mostly inversely correlated. Any major up move here can signal bearish for stocks. 

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Volatility on the Rise

The US VIX is rising again and its is time to ponder over this chart again. In the last week I mentioned that the US market may go higher but this chart says do not count on it. Why? Twice before last year the Dow formed a descending triangle and broke the lower end. In Aug 2016 I anticipated it and in Dec I thought otherwise. So this time I think I should step back and wait to see what the market intends to do. A break as you can see can cause a big one sided sell off. We saw 2 last year. If this happens then Nifty will not be able to protect the 8500 level and break down to 8200-8000. 

vix021116

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