Chart: US cues point to further fall in Sensex, Nifty today

By George Albert

The S&P 500 and Dow erased all the gains made after the Federal Reserve announcement to continue its quantitative easing programme. India which reacted strongly on Thursday to the Fed announcement is likely to follow the US markets down at the open on Monday.

Last week, we had mentioned that while the equity markets were expecting the Fed to go easy on its tapering the QE, the bond markets were not. However, the Fed surprised the markets by announcing that it will continue with its $85 billion per month bond buying programme. Its policy statement was also more dovish.

Reuters

Reuters

The markets were expecting at least a $10 billion reduction in the bond buying quantum. The surprise announcement drove both the equity and bond markets higher.

However, by Friday's close both the S&P 500 and Dow erased all the gains made on Wednesday. A look at the S&P 500 chart will show that the index is back at the pre-announcement levels (for S&P chart, click here). We are using the exchange traded fund SPY to track the S&P 500. The white horiztonal line on the chart shows the time on the announcement which was 1 pm Chicago time. Notice the huge green candle made after the announcement, next to white horizontal line. If you look at the subsequent price action you'll notice that the global index has come down the level from where it took off on Wednesday.

One of the reasons that the markets paused could be because the Nasdaq 100 hit an area of resistance, putting a stop to the over all market rally. All the other major US indexes --- S&P 500, Dow and Russell 2000 -- were hitting new highs on Wednesday. It was only the Nasdaq that was hitting resistance (for the Nasdaq 100, click here). We are using the exchange traded fund QQQ to track the Nasdaq 100. Notice the area marked by the white ellipse and the two horizontal lines. That is resistance from November 2000 as shown by the white horizontal line.

So what does it mean for the Indian markets. We could see the Sensex and Nifty fall on Monday at least to the level of Wednesday's close. If the index goes below that, the support level is shown by the blue horizontal lines (for the combined chart of NIFTY and Sensex, click here. For NIFTY, the support below Wednesday's close is between 5800 and 5860 and for the Sensex, 19,600 and 19,900. Note that both the Sensex and Nifty are close to their all-time highs, which is considered major resistance. These levels must be cleared the indexes to rally higher.

Indian equity markets also need support from the US market to rally further. The last leg of the rally in India was a result of the rally in the US markets. When the US markets retreated a bit on Thursday, the Indian markets fell on Friday. With the strong drop in the US on Friday, we could see a corresponding drop in India on Monday.

The announcement by the Fed to continue its quantitative easing at the same pace is both incorrect and immoral. It provides a bullish underpinning for the financial markets. And even though we are not with the Fed on principle it is not wise to fight it with our money. Hence we'd wait for a pullback in the market and then go long for a slow grind up. The major barriers for the bull are the all-time highs of the Indian markets and resistance levels of the Nasdaq 100. If Indian markets clear resistance, we'd look to the Nasdaq for resistance.

It is also possible that the market reads the continuation of the quantitative easing program as a reflection that the economy faces headwinds. This interpretation could lead to a fall in the market.


Updated Date: Dec 21, 2014 03:41 AM

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