Brent Crude has generated a buy signal after testing its 23.6% retracement. Short term indicators suggesting minimum target of 74.77. If we are able to cross intermediate high it should be construed as start of a new rally. Larger picture suggests target of 86 once 75 is crossed on closing basis.
In last two days, we have seen a sharp turnaround in IT stocks from a full-blown up move to a sharp U-turn. In fact this sudden reversal in IT heavy weights is no surprise at all as they are trying to follow their American peers.
As long the NYSE composite was trading near upper zone of rising wedge, Indian IT stocks have seen a sudden surge as they were gearing for a triangular breakout. Currently IT index is coming lower to break the support of running triangle.
The immediate breakdown trigger for BSE IT index is 2.2% lower, below which there is a possibility of 20% downside or more.
We also have a case of breakout in CBOE VIX on daily basis for the first time in the last 3 months, although earlier attempts were sold into.
The NYSE 3000 Composite should provide a lead direction for global markets as it is 0.3% away from a major breakdown. There is also a Big SELL signal which is seen in Dow Jones index which is projecting a Min target of December Lows.
Overall data suggest that risk is increasing at current levels
US market View- S&P 500 following Diamond Path
The weekly chart of S&P 500 after sharp pullback is in the process of forming Diamond Top. For Diamond top pattern completion, we need a sharp slide in S&P 500 retracing almost 78% of recent upswing and followed with another degree of larger rebound. Basically, the volatility should be so high that it clears out both bulls and bears in system.
Unlike traditional topping out patterns, neither bulls nor bears are in control of positions and since volatility remains fatal for market, it eventually ends up Bearish Diamond Tops.
To make sense of how volatility is playing out, we take monthly chart of CBOE VIX futures. We are seeing re-test of breakout line and it suggest that we are still into a high volatility phase.
A rebound from current levels could end up in 30-32% zone. For S&P 500, a sharp retracement could bring it back towards 2,400 before next leg of rally begins.
All this expectation is based on historical behavior of Diamond top patterns
Based on negation of breakdown theory, Nifty upside target placed at 11,500
Nifty has managed to surpass important hurdle of 10,816 thus negating down case scenario towards 10,100 and followed with breakout with larger consolidation. We may see start of new trend towards 11,500 which can even extend towards 12,300 in the coming months
The recent volatility in the overseas markets has forced Nifty to fall below 10,100 mark which not only turns out to be a long-term support zone but also coincides with earlier breakout zone in the NIFTY to USDINR Ratio. Nifty has had the worst time for this year as the index has declined for more than 7% for two consecutive months (Sept & Oct F&O series) because of the liquidity crisis witnessed by NBFCs due to the IL&FS fallout. However, the NIFTY to USDINR ratio has entered the support of 1,000-day SMA which marks a case of extreme oversold zone.
On the daily chart, Nifty has been sitting on Positive Divergence in RSI, along with RSI travelling in extremely oversold zone on weekly basis. The midcap and small cap indices along with BSE Financial index so far have been failing to form significant lower low. This has also caused sectoral divergence amongst indices and bears may find it difficult to justify fresh breakdown at current levels.
Despite extreme negative sentiment prevailing in the market, we see this opportunity as a silver lining within the dark clouds and hence expect a strong rebound of atleast 900-1,000 pts in the Nifty. We expect from a medium-term perspective, Nifty that has outperformed midcap and small cap index, will force fund managers to realign portfolio towards Nifty 50 Index or Sensex to counter tracking errors. From the all-time highs, now at current juncture, most of midcaps and small caps has been butchered down more than 30% and have confirmed the start of bear market. On the other hand, Nifty is down 15% and is still away from a bear market (official start of bear market is a fall of 20% from highs). This should further act as a catalyst for more funds being diverted towards Nifty and Sensex.
Weak Rupee reverses Nifty breakout The earlier breakout in Nifty from 11,350-11,700 zone (refer our report dated Sept 06, 2018) which had opened a smoothjourney towards 12,100 has turned void. Sudden change in open interest data suggests short-term pain for the market.his is after the open interest tally dipped below 2.67 crore mark with decline in Nifty Futures below 11,400 levels. This data suggests that long positions which was piled up at higher levels were forced to liquidate after major set-back in the rupee. In an ideal case, this long addition has scope to expand all the way to 3.75 crore similar to what we saw in Jan2015. The breach of 72 on closing basis in the rupee has created some panic in debt market and this could have resulted in risk-off trade.
One may find Nifty expensive at 11,500, but in dollar terms, Nifty has corrected towards levels prevailing in December 2017 which is around 10,200. The Nifty to USDINR ratio is currently trading near support of 159. With strong consolidation between March-July 2018, it may be poised for a sharp rally in the near term. The upside projection of this ratio falls around 183-184 i.e an upside of 14%.
Applying Elliot wave principle on Nifty to USDINR ratio, it suggest that Wave 5 of Cycle degree remains in progress and within same we have just completed Wave (2) of Minor degree which has landed in support zone i.e. line extended from Wave 2 and Wave 4 of Cycle degree.
With USDINR trading at 72 levels, currently implied Nifty is trading at around 10,200 and has scope for rally towards 12,800-12,900 in actual terms.
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The recent surge in USDINR beyond 69.50 and that too with rising gap does not augur well for the rupee in the near term. This move has negated our earlier assumption that rupee may strengthen after short term surge in USDINR till 69.50.
With RBI holding excess Dollar reserves and globally with rise in dollar index, volatility in USDINR should have been easy to contain till 69.50. However, in case of a fall in Dollar index, the situation could go out of control in the near term.
Based on breakout in USDINR on long term charts, a move past 69.50 opens the gate for a move towards 74.50. A move towards 73.50 remains a very likely scenario in the near term. As the breakout has occurred with rising gap near 5 year resistance mark, we can expect immediate extension of up move towards 73.50.
Applying principle of pole breakout, minimum upside is seen at 73.50 and this could have negative impact on Indian equities.