Risk rally in the offing

The pessimism in the current environment is widespread and it seems that a counter trend risk rally is in the offing. After watching today’s price action I am having a gut feeling that we have seen an intermediate term bottom and hence we can see a substantial rally for short term.

I will advise everyone to exit short with stop loss 1 -2 % below current lows. Stop loss for Nifty will be around 4700 and for Dow would be around 10500. Aggressive traders can also go long on Index with stop loss 1 -2% below current lows. I think some announcement for Europe is long due which may spark at 10 -15% rally in all risk assets.

I will prefer to buy the following risky assets in the following order.

&l  European banks

&l  European stock index

&I  Nasdaq 100

&;  Dow and S&P500

&;  Nifty and Asian stock index

&;  Copper and crude oil.

I will keep stop on all of them 1- 2% below the current low. I think the risk here is around 3% while returns can be in the range of 10 -12%. DXY can substantially correct and dollar can weaken. I also expect the correction in price of Precious metals to continue.

This rally can last anywhere form 1 - 6 months and is a sucker rally. People will feel that the worst is over but the next wave of selling will emerge once the risk rally is over.

Gold - Time to start accumulating

This post is just a head up on gold. It had corrected significantly form 1920 to 1570. Gold had done 76.2% retracement and the current support is around 1583 levels which i doesn't seem will hold. I think gold will correct to 1500 USD levels. 

Gold 240 minutes chart

The most pessimistic target for gold  is around 1100 levels (indicated by the blue line on second chart). Under no circumstances I think gold will fall below 1000 levels. I think long term investor should start investing in gold as it would be a safe haven when our current monetary system will be in turmoil. You can invest 10 -15 % of your investment portion (which is dedicated to gold) and average gold as it fall lowers towards 1100 levels. 

Gold weekly chart

It may be painful for investors to invest in gold at 1500 and watching it go down to 1100 levels but this is a pain worth taking. 

Market Musings

I have written a post in July last year   in which I was contemplating about the different cycles which markets will pass through in next few years.  I was expecting that market will go through the following cycles

 PHASE:-1

Phase	Time duration	Investment to hold	Investment to avoid
Deflation Scare	0 - 6 Months	Short term US sovereign debt, Investment  grade high cash flow generating corporate bonds, USD	Equity, Commodities, Gold, Crude oil
Double dip recession/Deflation	6 -12 Months	Short term US sovereign debt, USD	Equity, Commodities, Gold, Crude oil, all other debt except sovereign debt

At the end of Phase one the government will have options of either adopting quantitative easing or go for deficit reduction and choose to take a deflation hit. I believe that the government will go for quantitative easing.

Phase	Time duration	Investment to hold	Investment to avoid
If Quantitative Easing II comes and Reflation Trade begins	12- 24 Months	Commodities, Precious metals, energy and Equity	US treasury
Inflation	24 - 36 months	Precious metals	everything else
Hyper inflation	36 -  60 months	Precious metals, Food grains	everything else

* Readers may note that the time duration I have mentioned is just for illustration. Actual time duration may vary as per the future economic environment.

The market worked fine till re-inflation trade but instead of moving towards high inflation we are slipping back to deflation trade.  I think we are now going to repeat this cycle starting again form deflationary scare and therefore investor should rearrange their portfolio towards Short term US sovereign debt, Investment grade high cash flow generating corporate bonds, USD. The rest of my post is only about the review of all the calls i have given recently. 

Following is the chart of Australian Dollar and i have given this call 11, September when AUD was trading at 1.045 today it is trading at 0.9767. I expect this weakness will continue as the demand for metals and coal weakens AUD will correct very severely may be towards 0.75 levels in coming year. 

AUD

I have written a note on crude oil on 19th September when it was trading at 87 USD today crude made a low of 80 USD. I think the long term trend is down and it will reach 60 levels in next few quarters. 

NYMEX Crude

 In the same post I also wrote about copper which had crashed form 379 to 325  levels in just few days. 

COPPER

DXY index have already reached 50% retracement and is currently facing resistance at 78.90. I think that it may pause and consolidate at these levels which indicates that global equity markets can also pause and consolidate at these levels. I will be watching DXY very keenly and if it closes above 79  levels on weekly basis it will indicate a new wave of selling in all risky assets. 

DXY Index

Euro had also done 50% retracement and is taking support at 1.34 levels.  Since DXY and EURO both have completed their 50% retracement I think there is a good probability that they will consolidate at these levels before breaking out.  I think long term trend for Euro is negative and it should correct below 1.20. I will keenly watch 1.34 levels and if it breaks below 1.34  I will go short on euro. 

EURO

Although gold is correcting since last three weeks I have not given a short on gold as European situation is very volatile and it may cause huge volatility in gold prices. Therefore any call on gold will require a constant monitoring and strict stop losses in place. 

I think that gold is forming a gravestone doji pattern in its monthly chart and it should close around 1750 -1800 levels by the end of September. If this pattern is confirmed that October can be a very bearish month for gold and gold may crash down to 1550 levels at the minimum and even to 1400 in coming quarter. 

GOLD

I am most happy to spot the free fall in INR which started at 45 levels and INR have depreciated at to 50 levels in matter of days. I think the fall in INR is too quick to be comfortable and 50 is a psychological resistance, therefore I expect INR to consolidate at these levels and even correct to 46.50 levels before making the new upmove. My long term call on INR remains bearish and I think the next target will be 52 and even 60 in next few years. 

INR

Readers may remember that I have written that unless Nifty closes above 5120 levels it will move up. In last three weeks Nifty made four attempts to conquer but failed to close above 5120 levels on weekly basis. I maintain my view that any long call on Nifty should be taken only if nifty closes above 5120 levels on weekly basis. 

Nifty Weekly chart

This is a monthly chart on Nifty we can see that Nifty have already completed 38% retracement which is at 4800 levels. I expect that nifty will break below 4750 (weekly closing basis) and will move towards 4200 levels at the minimum in coming months. 

Nifty 

I would also like to inform my readers that although this is my broad call on markets, Market will always be very volatile with sharp pull backs and investors should not be disturbed by them. I would also like to inform my readers that there is no certainty in the markets, we all work on probability and I see an very high probability of a repeat of a 2008 crisis which will be 10X more worse.

CommoditIes Update

Some of the commodities which were showing tremendous weakness have now given confirmed sell. My own assumption about the global macro are very bearish and therefore I am expecting a good sell off in all industrial metals and energy. Let us look at the first chart of copper.

In the chart we can see that copper have made a distribution pattern and have broken below the trend line. It had also done a failed retesting of trend line which gives more conviction about the impending fall.  Traders can sell copper at cmp and on pull backs  with stop loss of 405. 

Copper Monthly Chart

The following chart shows the retracement on copper. The downside target for copper is at around 330 and 290.

Copper Retracement

 Similarly Nymex crude had been forming distribution pattern and have broken below the support  Traders can short crude at Cmp and average it around 88 with a stop loss of 92.50 and target of 75 -77 USD.

Nymex Crude

Currency Update

This week was a very eventful week for currencies. We had a massive breakout in DXY. Swiss Bank limited the movement in Swiss Franc and risk aversion is back in global currencies. In the post I written on 15 June 2011.

The current global macro environment is very volatile and it becomes difficult to predict short term prices movements for assets. Following are my observations and expectations as to how global macro will shape up in next few years

1. My base case scenario is very bearish and I expect Dollar up move will continue as global equity markets sell off due to risk aversion. 
2. Energy, Base metal and Industrial metal prices will tank as Chinese Economy slows down.
3. In the current decade I think Chinese GDP growth  will surprise on the down side and will perform worse then even the most bearish forecast.  
4. European banking stocks have seen a 50% fall in last one month which implies that something is terribly wrong in European banking system and this will have spill over impact on global banking system. 
5. LIBOR has already increased by 50% in last two weeks which suggest that risk in inter-bank lending is increasing, We may see credit cycle coming to a halt, this will have serious negative impact on Global economy and global equity markets
6. Greece 2 year yield have reached 50% and CDS have reached 30% which means that Greece default is inevitable. I think there will be many other countries which will also default and we will see significant changes in Euro zone. 
7. Euro will not exist in its current form which makes me extremely bearish on Euro target around 1 -1.15, maybe much lower. 
8. Gold is forming a terminal pattern and I expect it to correct form the current levels. But when I look at the uncertainty in the global macro and risk in Europe it becomes very risky to go short call on gold and other precious metals.  
9. QE III seems inevitable and may push asset prices up (temporarily), but its impact will be diminishing and lower then it was for QE2. Looking at charts my own gut feeling is that QE3 will have a negative impact on asset prices. 

• I think markets have already reached a tipping point where increasing monetary base will not necessarily push up prices of risky asset. Today risk aversion is so high that no matter how much more money is printed it will flow into (deemed) risk free assets like US and German treasures and therefore we will see all time low interest rates for them.

• US CPI inflation is already at 5% and if QE3 pushes energy and food prices up it will be very negative for global economy.

• US consumer average hourly wage is decreasing and will decrease further due to rising energy and food cost. Which means lower consumption. Perhaps this is the only reason why we QE3 was not announced by Bernanke on August 27.

• Emerging markets which are facing extremely high inflation will be face even worse inflation due to rising food and fuel prices which will cause further tightening and more slow down in global economy. 

Below is the Australian dollar chart. Its very near to its long term support and warrants a sell with a stop loss of 1.08 and target of 0.92 and 0.86. Sell off in AUD will also indicate a sell off in commodities. 

AUD/USD

As expected DXY went up form 73 levels to 76.50 levels in two weeks. This sharp increase in DXY indicates risk aversion and i expect that this risk aversion will continue going forward

DXY

My target for DXY is around 80 (at the minimum) I also feel that DXY is now breaking out of 26 years of down turn and I will not be surprised to see DXY at 100 -120 levels in next three years. 

DXY

Euro have broken a very important trend line and I expect a sharp correction in euro to 1.15 levels. 

EURO

My call on INR was bang on target we saw INR move up form 44.50 to current 46.50 levels. I think that trade balance will become more negative with simultaneous decrease in FII, FDI investment, decreasing expat repatriation and slow down in IT exports. Moreover Government finances are in worst shape ever as the Government have used state treasury for  useless programs like NAREGA ( where 80% of the money is wasted in corruption) and farm loan debt wavier which according to me is bribe paid by the Congress to buy votes.

We will see the full impact of mismanagement done by  congress led UPA government if global economy slows down. I expect rupee to break above 52 levels and probably o 60 levels in next few years. Below is the chart of INR. Near term target for INR is at 47 and 48 levels. 

INR