India or Euro Zone that's under more Trouble?

World markets have hit their 3-4 month lows on fear of impending Greece default/ Greece moving away from EURO. The result has been Currencies weakening against USD & JPY. Dollar Index at almost yearly highs.

We (India) are no different the Index has correctly around 14% from the year to date high. The reasons are varied in nature. 

Policy Paralysis, High Inflation, Low Growth, Current Account Deficit, Currency Weakening. 

Lets for a while shift focus to the Currencies. Although its not appropriate to compare USDINR to EURUSD (As the former is not a free-float currency). 

USDINR & USDEUR - 1 Year Charts

Assuming that all the problem is just with the Euro Zone & India is free from any problem of our own would be living in denial. Currency is the Indicator of Good Health of the Economy. The chart tells us that EUR has weakened 10.81% against the USD in the past 1 year however our Rupee is down 19.91% against the Greenback in the same period.

This clearly shows the flight for safety by investors (FII's pulling out money & don't seem to be interested to come back until the Policy actions are taken & key bills are passed in the Parliament. The recent Tax fiasco to tax any M&A that has an Indian asset involved has not gone well with the FIIs too. 

Dollar Index: If you want to know what is a Dollar Index. Please read it here.

Dollar Index is nearing its December Highs of 81.51 & a breach of it can strengthen it further & taken it to 84 levels & subsequently to 87. Chart clearly indicating that money is moving towards Greenback even the precious metals are being dumped for the Greenback!

Bottom Line: The government has been disappointing in passing any key reforms that would accelerate the growth. Even the Crude crashing has not helped us to reduce the deregulated Petrol Prices (Because the reduction in Crude price is offset by Rupee depreciating against the dollar). So still we end up paying the same amount for our imports even though crude has corrected.

It's an excellent time to pocket in ETF's of NIFTY & BANKNIFTY slowly in a SIP way for long term. Of course the trade on the long side does give good Risk to Reward Ratio at around 4840-4880 levels as lot of Index stocks are nearing crucial support area.  But as some genius has said Sell May & Go Away  - Its better to wait out May & Enter in June as you never know the news that may come out in May :-).

NIFTY View for the Week - 21Nov2011-25Nov2011

Recap for the Week: 

The rampant Bears ripped through the Bulls & by doing so it was a one way traffic where in the the Benchmark indices closed 5.09% down.

Performance of Global Indices & Commodities in the past week:

One always tends to look for a reason that led for a fall/rise of such magnitude (At least I do - You can call it a post-mortem if you like). 

Few of the reasons that come to my mind are as follows:

1. Weak Global Cues. Fear in Global Markets that Italy might be downgraded by rating agencies.
2. Currency Depreciation (USDINR hitting 32-month lows of 51.23). High Bond yields (Due to High Inflation)
3. There was also a rumour floating around that even India's Sovereign rating may be downgraded. Not sure how of this is true, so please take this with a pinch of salt if it indeed doesn't happen. But if indeed it happens then it would be very bad for Equity (Stocks would plummet, & Bond Markets (Yields would rise leading to bond prices falling further) & even the Currency Markets (Indian Rupee will depreciate further against USD, EUR, GBP etc.) will suffer.

Some of the above points have been taken up in detail below-

• Major cause for the markets performing so badly (to outperform its peers on the downside) being our Currency, Indian Rupee (INR). Rupee hit 32-Month lows of 51.23 to the Dollar. Rupee in the past year has lost 14% of its value. As per Equity master, Rupee is the worst performing currency in Asia & 3rd worst among all the currencies of the world.

USD INR Exchange Rate - 1 Year Chart

• Whats leading this slide in the rupee? Aren't we the country that is tipped to be growing at 8%-9% over the next few years ? Aren't we the leader of the Emerging Markets Wagon - "The BRIC". Here are few major factors that is hurting the Rupee -  
• High Inflation & in turn High Interest rates - Due to this the Industry profitability is getting hurt & this is making India story not so lucrative enough for the Foreign funds to invest here. So when these funds decide to look elsewhere, there are no Dollar inflow (Selling Dollar to Buy Rupee to invest in Indian Markets). Other being when the Foreign funds start to take out money from our country (They convert their Rupee amount to Dollars - Meaning Sell Rupee to Buy Dollars).
• We are currently in a phase of No Demand (Buying Rupee to Selling Dollars) & Huge Supply (Selling Rupee to Buy Dollars) for our currency. To speak in terms of numbers from mid July'11 to mid Nov'11, Rupee has weakened from 44 levels to 51 levels (16% in just less than 4 months in a Currency markets is a huge move). 
• What this has meant is made our Imports dearer. Oil is our major imports & our Oil Import Bill has soared & come last day of Feb'2012 when the Budget would be announced for the next Fiscal (2012-2013), We all will be in for a Nasty surprise when it comes to the Fiscal Deficit for the current financial year (Apr'2011-Mar'2012). Wont be surprised if we have the Fiscal deficit at 5-5.5 % of GDP.
• Now, Can't government do anything to cut this Fiscal Deficit percentage? Yes they can.  Fiscal Deficit by definition means the Net of Expenses & Income - In simple words its the difference between what government earns to what government spends.  With our home currency (Rupee) depreciating so much, the earning of the government has gone down as less tax collection & also the expenditure (Primary Deficit) - raising money by selling bonds has gone up. The yields of 10 Year G-Sec has gone above 9%, this is not a surprise as even the 91D & 364D yields are in the range of 8.8-9%.
• Government can reduce the fiscal deficit by going through with its Divestment option (Divesting its stake in PSU's - ONGC, OIL, SAIL, NBCC FPO all are lined up to hit the markets but Equity Markets being at such low levels government is reluctant to divest in such times (Rightly so). So these divestment can happen only say the next Fiscal or if situation improves probably during the last quarter (Q4 of FY11-12). This route could have been a major route to reduce the deficit but the situation is just not right for the action. As even if Government divests it has to divest at 52 week lows (Stock prices of these entity), & it also means government would get far less money in  return.
• What others things the Government can do is to ask the Central Bank (RBI in case of India) to intervene in the Currency markets  by selling some of its (~ $ 315 Billion ) dollar reserves to buy rupee & indeed provide some support. But our currency reserves are not that high for RBI to keep doing it all the time & can turn out to be a quite riskier exercise. for now RBI is not intervening that much & is just taking a close look at the situation.
• Are there any measures you think of the Government can do in current situation?  Please share (Gyaan Baatne Se Hi Badthaa Hain - Knowledge Improves When You Share it With Others)

*BRIC is an Acronym for the Emerging nations - Brazil, Russia, India, China)

Index Highlights:

• In the last weeks post - Nifty Weekly View, it was pointed out that NIFTY is making a Descending Triangle Pattern (Bearish Pattern) & if it did break 5168 on closing basis then things could get worse & can lead to a fall. Honestly I had not expected NIFTY to breach the supports of 5168 on Weekly closing basis. But that's Markets for you - they make their own moves. Markets broke 5168 levels decisively on monday & continued its southwards journey. 

Weekly Chart:

Daily Chart:

Weekly & Daily Charts Observations:

• Target was not disclosed in previous post. Target for the pattern would be the Height of the Triangle (6338-5168=1170). That would mean 1170 points to be shaved off from 5168 levels. This would take us to NIFTY levels of 3998 to be precise. The levels look crazy at this juncture, but keep a close tab & see if indeed we will reach that levels or not. The major supports below 4700 are at 4400 & 4200. Below 4200 we are most likely to test the Golden Gap (I call it Golden Gap because it has not be revisited for close to 2.5 years now). This wont be a one way move, we may halt at any of the support levels. But remember this pattern would get invalidated if NIFTY manages to close above 5168 (Candle formation to be above) on Weekly basis.
• NIFTY for the week lost close to 400 points but closed 263 points down at 4905. On Daily charts, Friday saw a Hammer Candlestick formation (This indicates if the lows of Friday is not broken (4837.95 the low on Friday) at least for short term we can have a meaningful pull back to the levels of 5000-5025. 
• OI Data for the November Series suggests the 4700 Puts has 52.91 Lakhs of OI followed by 4800 Puts at a OI of 59.6 Lakhs & the 4900 Puts at 54.06 Lakhs. These can provide cushion for the indices on any downside as the Put writers are confident that Indices wont go below 4800 levels this expiry. On the upside 5000, 5100 & 5200 Calls have 52.6 Lakhs, 58.6 Lakhs & 71.08 Lakhs of OI. These levels would remain tough for the indices to cross on the upside.
• Indicators: 
• Daily & Weekly Stochastics are at opposite ends. On Daily charts the Stochastics is at Oversold levels & on Weekly charts the Stochastics is starting its downward journey from the Overbought levels. What does this contradicting signal mean? It would mean we can get a pull back of 2 to 3% & post that Index would resume its journey southwards.
• The Weekly MACD Line is about to go below the Signal line, this would be bearish as MACD is a lagging indicator & it would more or less confirm that the down trend wont be changing soon & there is more room for downside.
• Bottom Line:
• Only a small positive in all this move that happened is we took out the previous high of 5169 & closed at 5399 (Couple of weeks back). So by doing so we made a Higher High. Now it remains to be soon how far we can guard the 4720-4740 levels to make a Higher Low. 
• It's the Futures & Options Expiry Week. Expiry on last Thursday of the month (24th November 2011). So the next four trading days one can expect a lot of volatility in the indices. 
• Last expiry we saw the bulls were in charge & on the Expiry day the short covering led the index to eventually break a crucial resistance of 5168 & expiry happened above 5200 levels. There was no unwinding done by Short sellers on Nifty Futures. Hence the rollover was very high. But Bears managed to pull the index down in this series. For taking positions on either long or short side,  keep Friday Close & Friday Low in mind. Immediate Resistance for NIFTY in any further upmove would be the Gap-Area created on Friday Gap-Down Opening. The Gap Area is 4964-4928.

Supports & Resistances - 4661 <- 4740 <- 4838 <- 4905 -> 4960 -> 5000 -> 5050

Please spread the word on the blog & let me know your feedback on the writing. Thanks for reading.

Dollar Index View - 07-Oct-2011

Dollar Index & It's Negative Correlation (Inverse Relationship) to Indian Markets 

Foreign funds influence our Equity Index movements in a big way. That is if they start investing then the stocks move up & if they start pulling out money the stocks keep going down. 

This movement can be tracked effectively by keeping a close tab on US Dollar Index.

US Dollar Index is an Index of value of United States Dollar (USD) relative to basket of currencies. The Basket of Currencies and there weightages are shown in the below chart.

EUR: Euro, JPY: Japanese Yen, GBP: Great Britain Pound, CAD: Canadian Dollar, SEK: Sweeden Krona,  CHF: Switzerland Franc

Dollar Index gains or falls when USD appreciates/depreciates against these basket of currencies respectively.

In the recent past a lot is happening in the Euro Zone related to high probability of Greece defaulting on its Bonds, also situation is looking grim for other European Union nations of Spain, Italy, Ireland, Portugal & Belgium. During such times a flight for safety is happening and there is a fresh demand for USD as a Safe haven, although inherently US itself is in a double dip recession scenario. 

What it means for us? In Dollar Index Euro has highest weightage of 58.6% so any more problems in Euro zone would weaken Euro, thereby strengthening USD. If USD strengthens, Dollar Index would appreciate. 

Dollar Index having inverse relationship with Indian Equities would mean Equities falling more with Dollar Index rising & vice-versa.

3 Year Dollar Index Weekly Chart

The chart is self explanatory. In March'09 Indian indices & majority of large-cap, mid-cap, small-cap stocks bottomed out & ventured into a fresh round of upward journey. During that time the Dollar Index was at its peak around 89. 

After a steady consolidation around 72-75 for four months from Apr'11-Aug'11. DXY (Dollar Index) has broken out & in a fierce rally has managed to close above its 50 Week EMA & now knocking on the doors of 200 Week EMA. A cross above 200 Week EMA would make it more stronger. Immediate resistance would be faced at 200 Week EMA & next resistance at its previous peak of 81.44.

Indicators:

MACD: Still in Buy Mode with Strength increasing.

RSI: Above 60 & moving up, Indicating the strength in the ongoing rally.

ROC: Positive and around 4%, indicating the Momentum is still strong in the move.

A close above 79 levels and a rally towards 81 would mean Indian Index (NIFTY) would breach 4700 on the downside & move lower. Keeping a close watch on this would give a better view of the times ahead & how Index would move.


Bottom Line: Looking at the Price, Indicators, Moving Averages & the situation in the Euro Zone - Probability of Dollar Index  going up is higher than correcting from here.

Market Wisdom: A security is said to be in an Uptrend, if the price is above its 50 Period Moving Average & which in turn would be above its 200 Period Moving Average. 

A security is said to be in an Downtrend, if the price is below its 50 Period Moving Average & which in turn would be below its 200 Period Moving Average.

*EMA - Exponential Moving Average

Happy Trading / Investing. Would be glad to receive comments from all on the views expressed.