Equity market in consolidation phase!
As scripted in previous update, DJIA index held below set strong resistance zone of 18000-18100 for pass through of 17350-17500 support zone, only to find base above set intermediate support zone at 16900-17000; over all, pre & post FOMC has been volatile and back-and-forth at 17000-18000 with firm close at higher end. FOMC tone (and guidance) is seen as neutral on growth and soft on inflation, going forward! FED is seen prepared for shift to rate-hike mode at baby-steps pace, starting from mid 2015. The positive outlook on macroeconomic fundamentals lends short term support for DJIA at/above 16900-17000, but need more feel-good economic data to trigger extended gains over 18000-18100 with intermediate support zone at 17350-17500. For the week, it could be either quiet (in the absence of flows) or sharp one-way move (on strong bids or offers in the absence of counter participation) to trigger break-out out of 17000-18000. Given the intra-2014 rally and recent recovery from above 17000, break-out bias into/over 18000-18100 is low, while don't see bolt from the blue to trigger sharp reversal into/below 16900-17000. Good to play end-to-end of 16900/17000-18000/18100; stay light and fleet-footed!
NIFTY strategy worked well as per script in previous week update. Reversal from from 8585-8635 long unwind (& short) zone held well at 1st re-entry zone of 7920-8070 (low at 7961) to bounce through revised stop-loss buy at 8085 to hit earlier stop-loss buy level at 8285. Keeping long term strategic base at 7700-7750, the trade was for 5-10% correction from 8625 and got 7.7%. What next? There is better clarity for strategic investors; 7935-8085 as strategic buy zone, 8435-8585 as hot-to-hold zone, 8085-8435 as NT consolidation (and trader's) zone. It is possible that downside risks would emerge from dilution in domestic optimism, while FIIs cut speed on the mad chase for India assets. Having said this, there are no strong reasons for bulls to abandon the street; hence see this as consolidation phase. For the week, good to stay end-to-end at 8085/8100-8435/8450; break-out either-way to attract good flows.
Risk-neutral stance cut appetite for Bonds
US 10Y bond yield (pre-FOMC) reversal from 2.35 to 2.0% got unwound completely (post-FOMC) before fresh buying guided close at lower end of 2.15-2.40% zone. It is also seen that extension into 1.90-2.15% or 2.40-2.65% is unable to hold given the absence of firm clarity from the FED on rate guidance! For the week, retain focus at 2.10-2.35% with firm bias on year-end appetite.
India 10Y bond fell sharply from set sell zone of 7.75-7.80 (scripted as super exit for FIIs) for push-back into 8.0-8.05% (shown as strategic buy zone for DIIs post completion of chase from 8.60-8.65%); thereafter marking time at 7.90-8.0%. What next? The focus range is already reviewed at 7.85/7.90-8.10/8.15% with weak undertone on dilution of rate-cut euophoria. It is now clear that RBI would stay in pause mode till Q2/2015 to await more clarity from influencing factors to act firmly without the worry to shift stance soon. As said, there are more cues against rate-cut now, hence the reluctance from RBI despite loud noises (and plea) for early shift to accommodative monetary policy stance. For the week, stay tuned to 7.90-8.15% with weak undertone on unwind of excess SLR by Banks when appetite is low from DII/FII investors. It is good for traders to track India-US 10Y bond spread at 5.70-5.95% for position guidance.
USD into bullish undertone
It was no surprise to see DXY into bullish mode from set ST base of 87.50-87.75 to pass through 89.50-89.65 resistance zone. With most cues in favour, ST base is lifted up at 88.75-89.00 for 90.50-92.50.
EUR/USD too failed at set end-of-correction zone at 1.2550-1.2600 to gain speed to take out set intermediate support zone of 1.2250-1.2350. The pressure is on the downside with focus range at 1.20/1.2050-1.2350/1.24.
USD/JPY found solid support at/above 115-115.50 for recovery into 120 and looks good for more into 123.50-125 with lift of base at 118-118.50.
USD/INR retain its consolidation mode at 62.85/63.00-63.85/64.00 post the REER value-adjustment from 61.70-61.80 (set USD short-squeeze zone) for 12M $ re-rating from 66.00 to 68.00. What next? Rupee will be under pressure for rest of 2014 from dollar strength, lumpy PSU $ demand, importers (and RBI) hunger below 63.00 and exporters appetite not below 63.85. Watch spot Rupee in traction with 12M USD/INR at 67.00/67.25-68.00/68.25; higher end seen not bad to cover part exports with trail stop below 62.85, as Rupee weakness beyond 63.85-64.00 is not completely ruled out. No comfort as yet to stay over-weight on Rupee.
Cues mixed on Commodities
Brent Crude in nice back-and-forth mode at 58.50-63.50 with NT bias for 65-70 consolidation while 56-57.50 stays rock solid. It is good to allow minor correction of sharp fall from over $115 to 58.50 to dilute worries on growth pick-up, not withstanding demand compression from China. Watch big-picture at 55/56.50-68.50/70 for end-to-end play.
Gold seen in bearish consolidation at 1135/1160-1210/1235; unable to follow through with bullish rhythm at 1235-1260 is concern for the bulls, while NT worst case not beyond 1110/1135.
Wish you all merry Christmas!
Moses Harding
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