Mirror Mirror on the Wall Reveal the truth to us ALL?
11 May 2013 www.indiacharts.com
B for Bull, C for Crash
With 6112 surpassed I have to question my observations. But there are many possibilities as to what is going on. Wave counts do change but the way to deal with it right now is to use shorter term signals. Like at the 5500 bottom my short term signals were indicating a bottom they are now indicating still the potential for a top.
So even if we have to go higher there must be a correction soon. Lets take one leg at a time. This is of course let me admit the 4th occasion that i called a bottom for a retracement and the high is surpassed during the last year.
The Midcap indices and many stocks that I put out last month exhibited 5 wave declines clearly during January to March. Once you understand basic EW there is just one thing to keep in mind. If a 5 wave move starts in any particular direction its not the end of the trend. It is followed by a 3 wave counter trend and another 5 wave trending move. The second 5 wave move is a high probability move. This is what several sectors charts stock charts exhibit clearly that after a bounce another decline is likely.
Even the number of sectors that are in downtrends has only increased after each new high in the market leaving only the last two FMCG AND PHARMA to hold fort. These two and monetary stimulus is all you need to fuel a bull market. But as discussed in Jan 2013 a bull market has one basic ingredient and that is participation from the worst stocks. And that is missing. The chart below shows the story so far. Green nifty, blue midcap, yellow smallcap.
The last bubble during a down business cycle was driven by IT. An external event. In US we have seen repeated bubbles due to easy monetary policy. These are possible until the point you have uncontrollable inflation, or the sector bubble bursts. Right now we have a run in defensive sectors as the only source of a potential bubble. Monetary policy is easy but not easy enough, and room is limited [quoting RBI]. Unless maybe they want to keep stimulating anyway. After all that is what they have done all year long. Amidst all their negative reports you have lower rates.
And the big one is this we are [government] cutting back on spending. Good for credit rating and bad for the economy right now. Does that make sense. But its not usually good for markets. This conflict continues.
So what is the structure of the market now? I have to mark the 5477 low as X and we are now in Z. In other words the Nifty final top is still to form. This will lead to more divergences with small/midcap indices at a medium term degree. They clearly looked like 5 wave declines. So they might under perform in this move against popular belief. However if strength in the broad market returns it would be a more bullish sign, that of a bubble starting. The upper trendline in the chart is at 6280.
A lot of bullish possibilities may come in but in the near term for the reasons I show here now I would like to see at least a short term correction before calling it higher. In other words this rally is A and we need a B wave down before C goes higher.
First a big run has been seen in the FMCG index which is in wave V of an impulse that needs to correct.
S&P has been in its 5th wave for some time, while wave counts have changed in between as shown in blue the upper end of the channel at 1650 should be serious level to watch out for the end of the rally since November
The DAX below shows a short term 5 wave rise too and that maybe ending soon.
In short the global equity rally that has fueled most of the world recently could be at the end. Without clear fresh signs of a extention once complete they would be due for a deeper than normal correction. Also the next chart of US 10 year Treasury shows a decline in potentially wave 3 down. This could be construed as higher rates for US.
Here are some short term indicators of sentiment that I always highlight as signs of a near term top. We call this "momentum swing" and it shows the number of stocks in positive momentum a negative divergence showed up and a falling indicator has reached 50, i.e. 50% of stocks are losing momentum.
I found this chart, and it reached an extreme faster than ever before. Its recent data of FII futures positions v/s Client positions reported by NSE. it shows FIIs long of 3Lakh contracts Nifty. The last two times the same level of positions was at the Feb 2012 top from where Nifty lost 14% in coming months and in Oct 2012 which was a smaller one month long correction of just 4%. So will we see a correction again on profit booking from here remains to be seen. There must be a limit to how long or short a particular participant can be. If you are not a contrarian thinker though you will read long positions as bullish forever but that is never the case.
Two indicators that I have discussed over time. The chart above shows first the IV in blue that has stopped falling since Jan and making a higher bottom but its still not gone up a lot. Still its not going down with the rally. Fear persists. Read it either way. The second indicator below the green line is the discount premium of Nifty futures that I have shown often now. Its been falling all month as premiums fail to rise. That shows bears are not giving up or bulls are not yet aggressive, again read it either way. But these indicators have not reversed previous trends and don't confirm the bullish outcome.
Among other indicators that I have discussed A/D ratios and Put/Call ratios are well out of oversold range but not clearly overbought or with negative divergences to talk about right now. But here is another interesting one. First look its bizarre to you, let me explain. Its a relative position chart of futures open interest in the market, relative to the index. So a falling indicator means that people are not buying and vice versa. Notice that at major tops and bottoms there are divergences. So was the case at the Jan top. However at the recent low we have not seen the indicator rise i.e. nobody is buying aggressively yet. [Sorry NATEX means BSE100]
Currency Wars or Just currency adjustments !
This takes me to a trend that I have discussed and just got very interesting in the last few days. A dollar rally. In this week it clearly spread across the board. I have shown many currency pairs in the past that were in wave 2 and 3 up to start. Some moved earlier and others in correction have just started. What is clear is all are making higher tops and bottoms. This includes, USD V/S AUD/CAD/SGD/CHF/BRL/ZAR/GBP. What started with the Euro is now joined in by Japan and an expected pledge by Britain as well. So the question at hand is "Does a weak currency spur stock markets or vice versa". Its a matter of perspective. In the 80s Sensex and USDINR both went up. Inflation was good. This is the current response of Japan to USDJPY as well. But many have started believing that USDINR going up is bad news for markets. But after 2 years of depreciation FII flows have not reversed, so much for that.
What has happened however is again perspective. Pain taken slowly is often absorbed and the effect changes. So the thought that a dollar rally is deflationary is now appearing like its a sign of good health of the USA. But currencies in todays world are free floating and reflect capital flows and not intrinsic worth; but will move towards it in crisis.
To print or not to print has kicked off what appears like a spreading dollar rally. Good for some in the short term with long term consequences [Japan] and bad for some in the short term [India] but long term positive. For India in the 80s a weaker currency reflected our consumption till our foreign coffers were empty; and then we had reforms. So USDINR went up pushing up imports till we had a crisis. Today on a floating currency its just the opposite. Its going up because of a crisis but once its up there it will be good for exports. The short term pain will have to be written off or hedged.
The dollar index above broke out of a channel for wave 3 up very clearly and its been an across the board event. The chart below shows the longer term pattern. 2 H&S patterns are being tested which will target 85 and 95 respectively.
In its recent report the RBI asked corporates to hedge. Maybe they can see it too. Maybe the world believes that weaker currencies or inflation will solve their problems. The US has managed it so far now its time for everyone to step in. Whether unilateral or not it will lead to big currency adjustments that have begun.
And that goes for the USDINR as well. There is no change in my forecast for the short term or long term on USDINR. There was some debate with some readers as to why there was a triangle in USDINR. Yes it need not be a triangle in wave 2, so mark it as W-X-Y-X-Z. Problem solved. Just because you can draw trendlines around it it need not be a triangle. In fact EWP [the book] says that wave 2 structures that appears like triangles are complex correctives and might have triangles in wave Y/Z of the complex correction. This is such a case.
In my previous updates I marked USDINR up move from 44Rs as 1-2-1-2, but as shown below I can also take the entire period as 2. where wave Y of 2 is a triangle. The implications are the same. Wave 3 up has to start. Targets vary though. Based on the first method from the recent low of 53.8 target is 63, however since wave 3 has a nature to be extended 1.618 times wave 1 has higher targets near 69. Based on the method shown below targets are 66 and 74. You seen as wave 2 made higher bottoms the projections for targets just moved upwards.
If you are still debating the view just think about one principle. A trend is 5 waves and a correction 3. All the moves up below are 5 and all the corrections of the last year a series of 3's. The trend has to be up. Focus.
Conclusion
All the correlations of the previous decade are in test. I think inter market divergences happen only when major trend reversals are due. Right now there are many. So keep an eye on risk at each level. The clearest trend is weaker currencies against the dollar. Equity prices are stretching but all count as being in wave V at some degree and so trail your stop loss up till it stops and change gears. A 5 wave up move is always followed by decent corrections.
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