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Dollar rally fails, but equities reach sell off points PDF Print E-mail
Written by George Albert   

Written for First Post
January 21, 2012: The dollar rally fizzled last week giving global equity prices a boost, but pushing them to levels of previous sell offs. The US and Indian equity indexes are at reversal points, putting bulls on notice.

Last week we had mentioned that both US Dollar and the 10-year US treasuries were poised to potential breakout and rally, which would have led to a sell off in equities. Both the asset classes are considered safe havens and rally in them often leads to a sell off in equities. However, both the dollar and the treasuries broke resistance but then sold off, leading to a rally in equities.

However, the fall in the Dollar has pushed the equity prices to key resistance levels. This is true of the Indian equity indexes -- Sensex and Nifty-- as well as the US equity indexes--Dow and Nasdaq 100. Also the fall in the Dollar powered a copper rally to a previous sell off level. A sell off in copper is often followed by a sell off in equities. Before we look at the indexes, it is important to mention that a break out these levels can take prices higher and result in a further sell off of the US Dollar and US treasuries. 

Indian markets
A look at the NIFTY chart shows that the index has reached the level of a previous sell off in early December 2011. (Click here for NIFTY chart ) If the NIFTY closes above 5100, it can rally higher. But till such time that happens the bias is bearish. Also notice the candlestick the NIFTY created on Friday. It is called a hanging man candlestick pattern, which is bearish. 

The SENSEX too has the same structure as the NIFTY. It also created a hanging man on Friday. If the SENSEX closes about 17,000 it can rally higher. (Click here for SENSEX chart ). The indexes are at an excellent level to take short positions in anticipation of a sell off. However, if the NIFTY rallies about 5100 and Sensex about 17000, one should get out of the short positions. Entering at the current level with a stop about levels mentioned can lead to a small loss, but the profit potential is high. Given the risk to reward ratio, this is a good time to short.

US markets

A fall in the US equities generally leads to drop in the the global markets. In the US two of the four major indexes are at reversal points and they are Dow and NASDAQ 100. However, the S&P 500 and the Russell 2000 (small cap index) has not hit reversal points. 

The Dow neared the point of reversal hit in July 2011 (click here for Dow Chart ) and the NASDAQ 100 has already hit the level. (Click here for NASDAQ 100 chart ). For the DOW the reversal point is around 12,800 and a close above that can take the index higher. For the NASDAQ 100 that point is 2450. The reversal levels are marked on the chart with a white horizontal line and white arrows.

If both these markets rally higher a lot of people will get bullish. But be careful as the S&P 500 is nearing its reversal level near 1350. The index closed at 1315 on Friday. A fall in the S&P 500 can drag the other indexes down. 

Copper

Copper hit its reversal level on Thursday and sold off on Friday. (Click here for Copper chart ) The reversal levels are marked on the chart with a white horizontal line and white arrows. In case copper falls, the equity markets tend to follow. So keep a close eye on copper to get a sense of direction for equities.

The dollar index sold off but is nearing a level from where it could bounce. A bounce will be additional confirmation for an equity sell off. In case the index falls below 79.50 it can go down further. The index closed at 80.22 on Friday.

Greece debt deal--a wild card

There is talk of a weekend deal between Greece and private sovereign bond holders. Under the deal bond holders may take a 50% haircut  and extend the maturities. Some people calculate that the 50% haircut and maturity extension would erase the net present value of Greek bonds by as much as 75%. This is disastrous for the institutions holding the bonds, but the fact that there has been a deal could lead to a market rally.