By George Albert
A frenzied appetite for risk resulted in a selloff in gold and US treasuries last Friday. Equities rallied in the US, which will push up the Indian markets when they open on Monday.
Actually, gold sold off from the resistance areas identified in the previous week’s article. (Click here for gold chart). In the week to 3 February, we had mentioned that gold was near a level where one could book profit and one could also go short. The precious metal entered the level identified in the previous article, stayed there for a few days and then sold off. The area is marked by white horizontal lines on the chart.
Fundamental analysts would say the fall in gold and US treasuries was due to the flight to risk driven by better-than-expected economic reports in the US. The US unemployment rate fell more than expected and the private sector added better-than-expected jobs. Technical analysts would say that the fall was the result of prices hitting an area of resistance. Prices often fall from resistance.
So what should traders depend on? Fundamentals or technicals? Reuters
So what should traders depend on? Fundamentals or technicals? In the week before last, the gold chart was telling us that prices had a high probability of turning. Fundamental data was not known to anyone till Friday. Hence, it was best to focus on technicals. At the very least the chart told investors not to go long on gold.
The 10-year US treasury had a strong selloff last Friday due to robust economic releases. As equities rallied, the prices of government bonds fell. This is a natural reaction as investors sell bonds to buy equities. While the instant boost in equity prices on the bond sell-off is gratifying to bulls, the long term consequences are not positive. A fall in treasury prices means a rise in interest rates, which eventually puts a damper on an equity rally.
So does Friday’s price action indicate that the global equity markets are off to the races?
Not yet. The Dow has to clear the 13,000 level and it closed at 12,862 on Friday. The S&P 500, on the other hand, must clear 1,370 after which there is resistance at 1,440. On Friday, the index closed at 1344.
Indian markets: In our article on 21 January 2012, we had mentioned that the Sensex and Nifty were at resistance. We had also stated that if the Sensex closed above 17,000 and the Nifty above 5,100, it could rally higher. That’s exactly what happened. In previous articles we had also mentioned not to buy the breakout, but to buy after prices pulled back to the point of breakout. The price action of the Sensex and Nifty last week is a text book illustration. (Click here for Nifty chart.
The Sensex chart can be viewed here.
The blue horizontal lines on both charts were shown in our 21 January article. Notice how the price broke out and fell back to that level before rallying again. The lines in red are the next resistance levels on the Sensex and Nifty, where prices could reverse. So longs should take profit and if prices break above the resistance levels then traders should buy on a pullback to the breakout level.