What course would the Markets take – A Path of Defeatism or Resilience?

The market is brimming with different views about the movement of the bellwether Sensex. However, there are a lot of developments happening alongside, which as decide course of the Markets.Lets have a sneak peek of the various Global and Domestic happenings.

The US Fed, with its muted set of numbers, has made it clear that there would be no stimulus i.e. `No QE3’.  So, we may see the asset markets drifting lower at least for the coming period. Traditionally, June and then from June on, US markets have some seasonal strength developing until the end of July, early August and then we have weak September-October months. So, we may see a stimulus only at the end of August, if the US Markets don`t indicate much strength. 

 On the other side of the Atlantic, we have, Europe’s Lehman (read as Greece) has finally won the confidence vote, however, its strategy of reducing the debt burden through reduction of the Government spending may boomerang. This is because normally austerity leads to a dampened growth, which would further lead to a downward spiral (a similar situation has been experienced in Greece, in the past year). So a bail out coupled with some structured developmental spending seems the best possible way out .But, as it stands, most economists and the markets believe Greece will default - the only question is when?

We now review the Crude prices and the impact of these two events on the Globe. The phenomenal correction in the Crude prices of 6% was due to IEA announcement to inject 60 million barrels of government-held stocks in the global market. The impact of this was that the world supply immediately increased by around 2.5% for the next month. 

However, this move can cool the oil prices only for a period of a month or two. But what beyond that? This can`t be used to expect the cooling of the commodity prices or taming down the stubborn inflation.

On the Domestic front, the political reforms seems to be the last thing on the Government`s agenda, as it tries to clear itself out of the various scams which have surfaced up since January. RBI`s umpteenth rate hike, does not seem to be sufficient enough to help tame inflation. But however, the effect of this hike seems to be unfolding. The D-street Oracles predict a further 50 bps rate hike in this fiscal. The Inflation number is mainly accentuated by the fuel prices which still have a considerable gap in comparison to the global crude price.

Based on this news, we look through the charts for the course taken by the Sensex, which is headed towards the second yearly decline in a decade.

Bearish Head & Shoulders Formation

 

The current pattern witnessed on the Sensex charts is a Complex Head & Shoulder Top. This is a bearish reversal pattern which has multiple shoulder pairs and thus, necklines. In the figure below, we can see that there have been two target possibilities; where in the Target 1 is seen at 16790 and Target 2 is seen at 16200 levels. 

The markets may see a few pullback rallies, which would again make it an interesting trade; however, the pattern failure would only be confirmed with a closing above the 18500 levels.

Any fall below the levels of 17800 (Neckline 1) and 17500 (Neckline2) would have this impending danger of pattern realization!

However, as long as the trend is your friend, you can always enter into profitable trades, provided, the Trend is your friend till the END!