By George Albert
The rally in the US markets gave bulls the strength to push the Indian market up. The Indian markets have been in a tight range for quite a few months waiting for direction.
In our column dated June 11, 2011, we had predicted a rally in the Indian markets as the S&P 500, a major US index that is followed globally, had fallen to a point from where it had to bounce. We had predicted that the S&P 500 futures contract would fall to 1237-1248 before bouncing. The index came to 1252 and stopped falling. After staying close to that level, the S&P 500 rallied, pulling the Indian and other indices up with it.
The time to go long in the Indian markets was when the S&P 500 was near the 1248 level. Going long now does not provide much of a profit margin and is fraught with the possibility of a selloff. One of the reasons for the rally in the US markets is the approach of the earnings season. For the past several quarters now, the markets have rallied before earnings. However, in the last quarter the market sold off after the earnings season.
A close outside the triangle can drive the Sensex up or down by 3,700 points. Reuters
At this point there are several factors against going long. First, the Indian markets have rallied substantially. Second, the Sensex and Nifty are moving in a consolidation pattern called a symmetrical triangle: they are not giving a clear indication of future direction.
In a symmetrical triangle, price moves in a continuously narrowing range as buyers and sellers battle to give the market direction. The narrowing range forms a symmetrical triangle when the peaks and valleys in price are connected.
Once prices break out of the triangle they usually have explosive moves in the direction of the break. Hence a break to the downside can push prices lower and vice versa. Professional traders tend to avoid asset classes moving inside a symmetrical triangle and take positions only after prices close outside the triangle.
A close outside the triangle can drive the Sensex up or down by 3,700 points. This is arrived at using what chart technicians call the “measured move.” The measured move is the distance between the second touch in a triangle and the trendline on the opposite side. In the case of the Sensex, the measured move is a little more than 3,700 points. Once the Sensex breaks out of the triangle, 3,700 points is applied at the point of break to estimate the target.
Interestingly, the Sensex touched the bottom of the triangle two weeks ago and rallied, just when the S&P 500 was bouncing off its key level near 1250.
The fact that the broad market indices are inside a triangle should discourage long-term investors from taking a position. Secondly, the Sensex and Nifty are reaching the top end on the triangle, from where it can fall.
Let us also look at the other markets for some signals, too. The dollar index, which measures the dollar against a basket of six major currencies, is pretty close to a rallying point between 73.50 and 74. The dollar and equity markets move inversely. Hence if the dollar rallies, equities can sell off.
However, copper, which is a leading indicator of market direction, has broken out of its symmetrical triangle and is rallying higher. This could mean that the Sensex could do the same. We’d ideally wait for the Sensex to close outside its triangle before taking a position.
George Albert is based in Chicago and edits www.capturetrends.com
