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Sensex at Death Cross; its future depends on easy money

The dramatic slowdown data from India, China, Europe and the US is expected to trigger another round of global monetary easing. The long-term benefits of monetary easing have been clearly discounted by the 20-year experience of Japan, but that's not expected to give policymakers pause.

GDP in India slipped to 5.3 percent for the quarter ending March 2012 from 6.1% percent in the previous quarter. In Europe, unemployment went up to 11 percent and in the US employment growth was way below expectations. The unemployment rate rose to 8.2 percent in May from 8.1 percent the previous month. US GDP was revised down to 1.9 percent in the quarter ending March 2012 from 2.2 percent.

The monetary easing, as and when it comes, will give a temporary sugar-rush to the markets. The prices of assets, from stocks to commodities, will rise but so will prices of essential items. The most dangerous easing will be the one coming from the US Federal Reserve, which will push up prices of oil back to where they were, hurt importing countries such as India. The best hedge against the negative effects of monetary easing is to dump cash in favour of gold, silver and other commodities. They tend to rise faster than equities.

If the Reserve Bank eases money during the Sensex's journey down to 15,000, we could see a strong bounce.

A monetary easing by the US, along with easing by India and China, will hurt the Asian economies more. The US does not face strong inflation like India and China and any easing of monetary policy will give a boost to inflation. Since the US dollar is still a reserve currency, countries are willing to export cheaply to America just to hold the dollar. This keeps inflation in the US low. Also since countries like India have a huge monetary overhang, it keeps the rupee weaker than the dollar. This results in imported inflation.

But till the talk of monetary easing gathers steam and there is actual easing we could see the equity markets continue their downtrend.

Death Cross Imminent on Sensex

A death-cross seems imminent on the Sensex chart. A death cross happens when the 50-day simple moving average (SMA) crosses below the 200-day moving average. A moving average price is the average price over a specified period. The blue line on the chart is the 50-day simple moving average and the black line is the 200-day average. Notice that the blue line is about to cross below the black line which will result in a death cross.

A death cross is a bearish signal and indicates the possibility of a further fall in the markets. But remember that moving averages are lagging indicators and give late signals. We prefer to look at support and resistance levels to identify turning points and price targets. The moving average is also very subjective. Some traders use the exponential moving average, which gives more weight to recent price action, unlike the simple average that gives equal weight. In fact, if one used the exponential average on the Sensex, the death cross happened a month ago. We, however, mention the death cross as a lot of traders make decisions based on it.

We feel that the Sensex can possibly go all the way down to 15,000. It closed at 15,965 on Friday, but the path down has a few strong support levels that could either pause or reverse the downtrend. And if the Reserve Bank eases money during the Sensex's journey down to 15,000, we could see a strong bounce. The support zones are shown by twin green lines. Notice that the market has bounced off one of them quite a few times. That support has not yet been broken and must be for a further drop. Given the rout in the US markets on Friday, we could see that level broken on Monday in India.

US Indexes Break Wall of China

Three of the four major US indexes broke the 200-day moving average on Friday. The 200-day average is considered the Chinese wall of support and institutional investors buy when prices come down to it. This phenomenon does not let prices fall below that level easily. But with the level now broken, Monday's price action will tell us if the downtrend has stopped or will continue.

The chart shows the S&P 500 index breaking the 200-day average. The Dow and the Russell 2000, which is the small-cap index, are also below the 200-day SMA. Only the Nasdaq 100 is above the 200 SMA. If one looks at the exponential 200-day averages, all the four indexes are below and the averages are sloping down, signalling further bearishness. This does not augur well for the global stock markets. As goes the US, so does the rest of the world.

However, as the markets fall, it puts increasing pressure on the central banks to ease monetary policy, which could provide relief to the bulls, at least temporarily.

George Albert is Editor, www.capturetrends.com