The Global Market Trader Weekly Update – 18th September 2011

Hi friends,

The week panned out as expected. Most levels of asset classes and currencies covered in the previous update were tested and as expected markets bounced back from those critical levels. For the next week all eyes will be on the FOMC meeting where market participants would be looking at some kind of stimulus measures. Whether it happens or not is secondary but the markets are likely to pullback a bit further in anticipation. So for the equity markets the bias is up for the next week. But the overall medium term trend is down and investors need to use upsides to exit their portfolios for the time being. Indian investors may consider moving to debt for the next 7-8 months as one is getting a return of almost 9 percent risk free. Once the markets are out of the woods one may consider reinvesting at lower levels by shifting from debt to equity. At lower levels one can even consider investing in structured products from a 3 year perspective.

Coming back to the FOMC meeting, it would be absurd if a QE3 is announced as the initial two stimulus plans have failed and a third plan may not bring in the desired results. It is quite possible that the FED may just choose to let the equity markets suffer the immediate pain which looks inevitable and focus on long term economic growth measures. The focus of the FED may shift to reduction of debt.

Even if the FOMC announces an asset purchase programme (QE3) the upmove in equity markets are likely to be short-lived and after an initial upmove the focus is likely to shift back to the Europe debt crisis which could lead to a continuation of the downtrend.

Right now the European banks seem to be selling gold to prevent the euro from falling and it is evident in the way gold prices have come off in the past few days. India and China have been buyers in gold since a long time and Europe had joined the bandwagon a few months back. The one on the short side would possibly be US banks, the reason being to prevent the dollar from falling. So given the current scenario if India and China continue adding to their gold holdings the US banks would be forced to cover shorts which would result in a quick upmove in yellow metal. On the other hand if Europe continues selling gold to stabilise the euro the sideways movement could continue for sometime which would be a good opportunity for investors to buy.

For the Indian markets the IIP numbers came in at a shocking 3.3% in July. Inflation also came in at 9.8%. Participants would have expected the Reserve Bank of India (RBI) to reduce interest rates so that growth rates would be sustained. However the RBI increased the repo as well as reverse repo rates by 25 basis points. It is clear that the RBI is more concerned about the inflation cooling off. It seems that the inflation is more supply sided rather than demand sided as inspite of continuous rate hikes inflation has not cooled off.

What Are The Markets Saying?

US Markets

Dow Jones Industrial Average

The index held the level of 10750 and gave a nice pullback. The pullback is likely to continue coming week with 11600 being the key resistance. The index could move to 11800 on positive news from the FOMC. The overall medium term trend is down with a target of 9877.

S&P500

The index is likely to move to 1250. The overall medium term trend is down with a target of 1050.

Metals

Gold

The metal continues to be in a sideways movement. The price is currently trading in a zone of $1825 and $1770. A break above $1850 will signify a continuation of the trend. A break below $1770 could result in a test of $1650 which would be a good opportunity for investors to buy for a target of $2000. In case the downward move happens the time period for the target could move to the end of the year.

Currencies

EURO/ USD

The pair pulled backed strongly to 1.3936 after testing 1.3500 before closing the week around 1.3795. Price volatility has been high and a test of 1.3450 and 1.40 cannot be ruled out intra week. The Key event would be the outcome of FOMC meeting.

GBP/USD

Expectations are currently aligned on the daily chart as signified by the 55 period containment zone (1.25 std deviation) a downward movement as prices are below. A break below 1.5750(lower containment 4 hour) could take the pair to 1.550. On the upside 1.5880 is likely to be a strong resistance.

Indian Markets

Nifty

The nifty is likely to move to 5265-5300 if it closes above the level of 5130. A move right upto 5450 cannot be ruled out if positive news comes out from the FOMC. Use this opportunity to exit your nifty holdings. Keep in mind the medium trend is down with a target of 4650.

PS: Trading in all asset classes/currencies covered is not going to be easy due to high price volatility. Most markets are depicting corrective waves which by themselves are trickiest to trade.

Happy Trading!!!

Savio

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Tags: dow, forex, Gold, SP500