The Sensex and the rupee are at critical breakdown levels after the stock market fell on Friday and the rupee was retesting its previous lows against the US dollar. The drop in the US equity markets on Friday might provide another downward nudge to Indian equities and the dollar rally could push the rupee lower on Monday.
Readers of this column should not be surprised by the moves in the equity market and the rupee. We had mentioned that the Sensex was in a downtrend and was supported by the gap. The same is true of the Nifty. (Click here for charts of Nifty and here for Sensex) In last week’s article we mentioned that price gaps are demand areas and happen when the opening price of a day is higher or lower than the closing price of the previous day.
When there is extreme demand prices open much higher than they closed the previous day. That’s what happened to the Sensex on 31 January when it opened at 16,965 after closing at 16,863 on the previous day.
On the two charts you’ll see two horizontal lines with the upper one starting on the day prices opened higher and the lower one showing where the prices closed the previous day. Given the high demand in the area you’ll notice that prices have come down to gap many times but never closed below it.
Notice that last Friday (4 May) prices went into the gap and closed it. However, prices still have not closed below it, so there is still a possibility that the Sensex and Nifty could catch a bounce. In case prices close below the gap, the Nifty, which closed at 5,086 on Friday, can go all the way down to 4,800. Sensex, on the other hand, can go down to 16,000 and it closed at 16,831 on Friday.
A key factor favouring the bears is the fall in the US equity markets. The Dow dropped 168 points, or 1.27 percent on Friday. As the Indian markets tend to follow the US markets, the likelihood of the Sensex and Nifty closing below the gap on Monday is high. Additionally, as the gap has been hit a few times earlier, the support is weak, increasing the possibility of a breakdown. Support areas are where buyers exceed the number of sellers. The more times sellers bring prices down, the lesser the number of willing buyers, which eventually leads to prices breaking down.
However, bears should not take positions till prices close below the gap. Even better would be for prices to fall and then short a rally back up to the gap.
Like the Sensex and Nifty, the Indian rupee too is near its all-time lows. A few weeks back we had mentioned that the rupee was on its way to 53 against the dollar. That forecast has come true. The all-time low the rupee has hit against the dollar is 54.29. Unless the rupee breaks that level it will not depreciate further.
Remember the last time the rupee went to its all-time low in December 2011 it appreciated very fast. Now with the rupee back near that level, it’s the best time to go long on the Indian currency with a stop-loss above 54.50. The amount of loss if the rupee depreciates further is low, but the profit potential is high.
Everyone says buy low and sell high, but few do as it takes courage to buy low. Rupee is at a low presenting an extremely cheap opportunity to buy. If it goes lower one can get out at a small loss.
The price action on Monday is crucial for the Indian rupee and equity markets. It will show if the markets are ready to a break down or if there will be another correction to the downtrend.
George Albert is Editor, www.capturetrends.com