China’s Year of the Dragon
To track China we are looking at the ETF with the symbol FXI, which follows the FTSE China 25 index. A look at the chart shows that after a strong selloff, China is consolidating (Click here for the China chart). The horizontal lines above current prices show resistance and those below show support. However, the unless FXI closes above $39 and below $26, it will be a range-bound market.
A continued tightening of monetary policy will keep China bearish and could take FXI all the way down to $19. However, an easing of money can lead to a strong rally, as inflation expectations come back on the table in 2012 – the Year of the Dragon.
Japan weighed down
The Nikkei 225 is a basket case as government intervention in the market has destroyed risk-taking. The Japanese hold cash and bonds — not equities — due to which one sees low interest rates, a strong yen and a weak equity market.
A continued tightening of monetary policy will keep China bearish and could take FXI all the way down to $19. Reuters
That being said, the index is near the low it hit during the tsunami, as shown by the arrow on the chart (Click here for Nikkei chart). This could provide it with temporary support. We, however, feel that the index is headed to its 2009 lows near 7,000, which is not that far. The trend is still down.
The blue horizontal lines show the support and resistance areas below and above current price respectively
The mighty US dollar?
The US dollar holds the key to equity and commodity markets (Click here for the dollar index chart). If the dollar continues to rally it is generally bad for the equity and commodity markets. Right now dollar is at resistance, but has been holding there for nearly three weeks. If the dollar breaks out it will go to the next level marked on the chart, which will be a negative for equities. We feel the dollar has some more to run up before a strong correction or reversal.
Remember, in a multi-year picture, the dollar index has been range-bound between 70 and 90, and given that history we don’t expect an explosive long-term move in the dollar anytime soon.
Will gold shine?
The yellow metal entered a strong support zone last week and rallied strongly. The support zone is shown on the chart (Click here for the gold chart). Generally speaking, if the dollar rallies we may see gold reach deep into its first support zone or even fall lower to the second zone. However, if the rally in the dollar is driven by fear, gold will rally, too.
The gold chart is showing strong down moves after it peaked earlier in 2011. There have been two strong down moves and generally there are three. So it’s possible that gold may rally some and then make one more down move, before continuing on its multi-decade uptrend.
Silver’s white future
Like gold, silver too bounced from near a support zone last week (Click here for silver chart). If the dollar rallies some more we could see the white metal go deep into the support zone between $23 and $25 and then rally. We feel that the white metal could come down to the $20 level, but will not have much of a downside after that.
Note that if gold rallies silver could follow in sympathy. Silver, besides being treated as a commodity, is a favoured alternative to currencies after gold. Monetary easing in China or US could lead to a rally in both gold and silver.
George Albert is Editor of www.capturetrends.com
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