Tech musings

In my two previous posts on crude oil on June 1 and on 9^th may, I wrote that crude “Crude recently broke below the channel and is now heading towards 70 USD per barrel.”  Subsequently crude oil made a low of 77 USD and recovered sharply from there.  As we can see in the chart Nymex crude took support near historical lows of 77 and bounced upto 100 USD. Despite this robust 30% upmove crude still remains one of the weakest commodity on charts.

If we look at the given chart we can see that crude faced resistance at previous channel marked in yellow and had weakened considerably from there. Again the support for crude from here would be around 77 USD.

 

Crude Nymex - Daily chart

In the second chart we can see a head and shoulder formation developing on crude oil.  Crude is currently forming the right shoulder of the pattern. Once crude trades below 90 USD levels it will correct sharply towards 77.

 

Crude Daily

In the third chat is the yearly chart of crude. Here we can see that Crude touched 100 USD levels in 2007 and since than it had been almost 6 years but crude never closed above 100 USD. The current yearly candle for crude is a doji and as we can see the support line for crude is around 50 USD. I think there is high probability that crude will trade around 50 USD levels by next December.  Secondly despite an open ended QE by FED and ECB Risk asses have failed to move up sharply, I think this is a sign of impending slowdown in global economy.

Crude Nymex- yearly chart

I have updated my view on nifty in the beginning of this month when Nifty was trading at 5342levels.  Nifty closed this month at around 5703 i.e. up move of around 7%. Going forward from there are quite a few possibilities. Going only by chart analysis it seems that Nifty should move towards 6350 levels. Although there will be lot of congestion around 5800 -5900 levels. But historically October have been one of the worst month for Indian markets. Secondly when we look at charts of other major index they are all trading near major resistance levels. Thirdly, QE announcement has come and there won’t be any significantly liquidity event taking place in next few months. Then if we look at signals from US or Europe it seems that growth is slowing down significantly. 

Conditions in India are different due to some reforms pushed by central government and possible RBI easing which may push domestic market. Keeping all this contradiction in perspective it would be advisable to keep tight stop loss for long position, stay nimble and hold cash.

Nifty Monthly chart

Next chart is a monthly chart of S&P500. We can see that S&P500 is moving in a rising wedge pattern which is inherently a bearish pattern. The support for S&P500 is around 1300 levels while resistance is at around 1500 levels.

S&P500 - Monthly chart

Next is the daily chart of S&P500, We can see that even in a daily chart S&P500 is forming a rising wedge. S&P500 is already trading near resistance at 1480 levels. Support for S&P500 is at 1380 -1400 level. 

S&P500 - Daily chart

Next chart is of Nasdaq 100, we can see that Nasdaq is trading at the upper end of the long term channel, any break out from this channel will result explosive up move, I think it is highly unlikely and difficult for Nasdaq to break out of this channel.

Nasdaq 100

Next chart is the weekly chart of Italy 10 year yield. We can see that yield took support at 5% level and has bounced back from there. If Yield fails to fall below 5%, it may move up from here which will signal risk off trade and bad news coming out of Europe.

Italy 10 year yield

 Last chart is of INR. INR broke below the trend line which I felt was highly unlikely event. Since INR has given a monthly closing below 54 the breakout should be considered to be conclusive. In this case INR may fall further to 52 and 50.50 levels going forward. But my long term view on INR remains unchanged and I think INR will depreciate sharply going forward.

INR weekly chart

Tech Musings

My last week call on nifty was almost prophetic. Nifty was trading at 5342 levels when I gave a buy call with a stop of 5050. Nifty moved up 230 points in this week and closed at 5577 levels. If we look at the given chart we can see that the down trend in nifty which started in November 2010 has been broken. Therefore the primary trend for this market  is now on the upside. 

Nifty Weekly chart

I think it’s very likely that we will retest the previous top of 6350 on Nifty. Nifty may also face resistance at retracement levels of 5650 and 5900 levels. Whether Nifty will break 6350 is not very clear now but my gut feeling is that we should reverse from that level. Investors should wait for any pullback to add or create new position in Nifty.

Nifty Weekly chart

Next chart is a monthly chart of Ambuja cement. Just like HUL Ambuja is breaking out from a multiyear consolidation pattern. It had repeatedly taken support at 150 levels. I think the stock is next candidate of runaway rally and may reach 300 from here.

Ambuja cement Monthly chart

Similarly ACC is also on verge of a breakout from multi year consolidation pattern.

ACC Monthly chart

Gold has gained almost 80 USD this week. As we can see from the chart gold is now trading near the trend line resistance. Any pull back towards 1700 can be use to create new positions. 

Gold Weekly

Euro had broken out of a downward sloping wedge. Next target for Euro seems to be around 1.400 levels.  Any pull back can be used to create long position on Euro.

Euro Weekly 

INR corrected severely during this week and have reached the support levels at the trend line. If INR closes below 54 levels on weekly closing basis than we can expect further corrections in INR.

INR

US 10 Year yield chart is very similar to Euro. Its moving in a downward sloping wedge. Once yield breaks above 2% it can move up swiftly towards 3% – 3.5% range. This won’t be very surprising as even after QE2 US 10 year yield moved up from 3% to 4%.

US 10 Year Yield

Over all my view is that risk has receded from the market which has caused the rally in risky assets. Europe is now gradually moving towards a banking union. I would advise my readers not be distracted by the news flow. All countries inherently understand that disintegration of Eruo would be catastrophic for everyone. I think the game changed in last November when Mr. Mario Daraghi was appointed as ECB governor. He discarded the old philosophies and LTRO gave ample proof that all countries agrees in private but oppose the plan in public to pay lip service to maintain their vote banks.  I think no matter how many objections are now raised in public Europe will slowly and gradually move towards a banking union.

Tech Musings - Review

BSE Healthcare index has broken above previous high and is witnessing a sustained uptrend. On 4^th May 2012 I wrote that “The next chart is of BSE Healthcare Index. Even in falling market, we can see that Healthcare index is making new highs, Defensive investors can accumulate Healthcare stocks.”

From sub 6800 Levels on May 4^th the index have moved above 7600 levels. If we look at the given weekly chart of BSE Health care we can see that we have already reached at the resistance of upper channel. I think Investors should book partial profits at this level while new investors would wait for pull back and get into healthcare stocks.

The next chart is of Hindustan Unilever. I had given the call on HUL on October 2, 2011 when HUL was trading at around 324 INR and reiterated my call on June 6^th when HUL was trading at 440. In a matter of just three months HUL had hit the target of 550 INR up by total 66% in 10 months. I think there is still lot of steam left in HUL and the stock may move upto 600 INR. Investors should book profit at that level. 

Market Musings

Nifty has been moving in a very tight range since last few months. My tactical trading call on nifty given on 12^th June had hit the stop loss. I have been continuously bearish on markets and Indian economy since November 2010. Performance of Indian economy has deteriorated as per my expectations but markets have failed to slide along with economy. Extremely high inflation is a major reason behind the conflicting performance of economy and market. Stock prices are correcting in real terms but due to high inflation nominal prices don’t correct. 

Below is the monthly chart of Nifty. We can see that since Nifty started moving up in 2003 it is following a trend line. This trend line was tested during the bottom of 2008. The same trend line is providing support to the market. Despite spending months near the trendline market could not break below this trendline.

Unless Nifty breaks below this trend which is at around 5100 on monthly closing basis markets will not correct severely. More over the current month’s candle stick pattern suggest that this month can be good for the market. Investors should go long on index with 5050 as stop loss on weekly closing basis.

Nifty Monthly chart

Current global macro situation is very perplexing. On one hand we have the Damocles sword of European crisis hanging on the head while on the other hand we have constant quantitative easing done by Central banks globally.

In February 12, I wrote “I think the basic case for deflation/depression or a big fall in asset prices is now almost over. Previously I would give it a probability of 65% -70% but now I would only give it a probability of 20%. Unless something catastrophic happens I see the price of risk assets moving upward form here in nominal terms but in real terms price of some risky assets may correct when adjusted for inflation”  

I think central bank have won this battle hands down. Once the ECB in principal has accepted quantitative easing as legitimate then there is nothing which stops ECB from printing a trillion or two Euro to stabilize economy. On Thursday Mr. Daraghi announced that ECB will start buying short term debt for peripheral countries in order to bring down their debt cost. Spanish 10 year yield fell from high of 7% to 5.75% in this week. 

I think it is useless to expect any meaningful correction in asset prices. Even if there is a correction it will be temporary and it will only result into more QE by central banks. Ultimately it will fan inflation in these economies which is the only way to get out of such huge debt levels. Ultimately this decade will be a decade of stagflation.

But there are reasons not to be overly optimistic on markets. One reason is that earnings growth in US has slowed down considerably. In the next chart we can see that in Q1 Earnings growth reported by S&P500 companies was 6.54% while revenue growth was 5.82% YOY.

S&P500 Q1 Earnings Growth

In Q2 Earning growth of S&P500 is 0.06% while sales growth has been 0.53% YOY.

S&P 500 Q2 Earnings growth

  

If we look at YoY earnings growth for S&P 500 companies. We can see that EPS for S&P500 were growing by 20% YOY has come down in last three quarter and recent quarter EPS growth is approaching 0. If this trend continues EPS growth may go into negative and one of the biggest pillar which has supported US markets will crumble. 

Earning Growth time series

The following chart shows the number of companies reporting EPS YoY EPS growth from S&P500. Out of 500 companies of S&P 500 till Q3 2011 approximately 80% companies were reporting EPS growth. This trend has deteriorated significantly in last three quarters. In Q2 2012 only 59% companies have reported earnings growth YOY. 

% companies reporting Earnings growth in US

Next chart shows the 10 year yield of Spanish government bonds. We can see that last week yield collapsed on ECB announcement in which they principally agreed to debt monetization to keep cost low. I also think that all the opposition from Germany is just a lip service to keep domestic audience happy.

  

Spain 10 year Treasury rates

Looking at all these factors I think market will continue to grind higher. US markets looks the most attractive, EU markets are trading very cheap and if ECB is indeed going to print trillion Euros markets should move higher. Deteriorating earnings are a real cause of worry. If earnings and macro data improves in next six months we will see new highs in US markets in 2013. China will continue to face hard landing and its growth rate will slip towards 5% mark. India is a lost case as long as the current government is in power. 

Tech Musings - Precious metals update

In my previous post on June 4 2012, I have given a heads up to my readers on Gold. The minor trend on gold was broken and the target for gold seemed to be 1700 USD. Gold is already trading near that level and now it had also broken above its primary trend line. 

Gold Weekly Chart

Gold  was consolidating since last one year, and the have given a breakout  from the pattern. Since the consolidation has lasted for fairly long period of one year the implication for this breakout would be very bullish. If gold sustains above the trend line for one more week the target for gold would be about 2000 to 2100 USD. Traders can go long on gold with a stop of 1590 and Investors can go long on gold with a stop of 1500 USD. 

Gold Monthly chart

Before we delve into long term prospect of gold let us look into structure of gold and how the prices have moved since gold was de-pegged to USD. From 1971 to 1979 Gold prices saw prolific run from 35 USD to 700 USD in a period of 10 years. This move unfolded in  three waves as we can see in the chart. 

Gold Monthly chart

Wave 1 for gold took the prices from low of 35 USD to a high of 200 USD. During Wave 2 price corrected from high of 200 to 100 USD which was 50% correction. In wave 3 gold prices went up from 100 USD to 700 USD. After that gold consolidate at these levels for 20 years and prices came down to 200 -250 USD an ounce.

Gold Monthly chart

The current upmove in gold started in 2001 where gold moved up from low of 250 USD to high of 1921 USD. 

Gold Monthly chart

Although gold had broken out from 1 year long triangle pattern as shown in the first chart, if it fails to sustain above 1700 or go above 1900 USD than it will continue to move sideways. In that case gold will reach the lower end of channel by April 2013 and a new bull run should start by then.

Gold Monthly chart

In the given chart we can see the retracement levels for gold. Gold prices took support at around 1520 levels which was 23.6% retracement. Gold had not fallen below 23.6% retracement, which implies that the underling trend in gold is very strong. It also indicates that the next upmove in gold will be very dynamic and violent.

Gold Monthly chart

If we assume that the current upmove in gold is going to be of same intensity of that in 1970 -1980 and we extrapolate that move on current cycle, we can see that gold had only done 38.2% of that move. The target for 38.2% was at 1984 USD and gold made a high of 1921 USD. Ultimately I think this uptrend in gold will take this metal to atleast 50% level where by the prices would reach 2517 USD  or higher.

Gold Monthly chart

If we adjust gold prices for US Consumer price inflation we can see that gold made a high of 3.2X consumer basket in 1980. Today gold is trading at around 2.6X consumer basket. We all know that government data is manipulated and the method of calculating CPI have changed considerably in last 15 years. I believe that US CPI is under represented by a full 200 BPS. Even If gold peaks at previous levels than the target for gold should be 2100 USD considering US CPI has not been under reported.

If we value gold aggressively and believe that US CPI has been under stated by atleast 200 bps we can assume that gold is still trading at 2X consumer basket, then price target for gold should be around 2700 USD.  

Gold Adjusted for US CPI

Silver has also broken above the consolidation pattern. Readers must remember that I was bearish on both commodity given that Gold goes below 1520 levels and Silver goes below 26 USD level. Both commodity had held above that level. Now we have got an upward breakout in both commodities. Which indicates that both metals are should move higher in coming period. 

Silver Weekly chart