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Sensex at Death Cross; its future depends on easy money PDF Print E-mail
Written by George Albert   

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June 2, 2012: The dramatic slowdown data from India, China, Europe and the US is expected to trigger another round of global monetary easing. The long term benefits of monetary easing has been clearly discounted by the 20 year experience of Japan, but that's not expected to give policy makers pause.

GDP in India slipped to 5.3% for the quarter ending March 2012 from  6.1% in the previous quarter. In Europe the unemployment went up to 11% and in the US employment growth was way below expectations and the unemployment rate rose to 8.2 % in May from 8.1% the previous month. US GDP was revised down to 1.9% in the quarter ending March 2012 from 2.2%.

The monetary easing as and when it comes will give temporary sugar rush to the markets. Prices of assets from stocks to commodities will rise but so will prices of essential items. The most dangerous will be further easing by the US Federal Reserve which will push up prices of oil that will hurt importing countries such as India. The best hedge against the negative effects of monetary easing to to dump cash in favor of gold, silver and other commodities. They tend to rise faster than equities.

A monetary easing by the US along with easing by India and China will hurt the Asian economies more. The US does not face strong inflation like India and China and any easing of monetary policy will give a boost to inflation. Since the US Dollar is still a reserve currency, countries are willing to export cheaply to the America just to hold the dollar. This keeps inflation in the US low. Also since countries like India have a huge monetary overhang it keeps the Rupee weaker than the dollar. This results in imported inflation.

But till the talk of monetary easing gathers steam and there is actual easing we could see the equity markets continue its downtrend.

Death Cross Imminent on Sensex

A death cross seems imminent on  the Sensex chart (Click here for Sensex death cross chart). A death cross happens when the 50-day moving average crosses below the 200-day moving average. A moving average price is the average price over a specified period. The blue line on the chart is the 50-day simple moving average and the black line is the 200-day average. Notice that the blue line is about to cross below the black line which will result in a death cross. 

A death cross is a bearish signal and indicates the possibility of a further fall in the markets. But remember that moving averages are lagging indicators and give late signals. We prefer to look at support and resistance levels to identify turning points and price targets. The moving average is also very subjective. Some traders use the exponential moving average which gives more weight to recent price action, unlike the simple average that gives equal weight. In fact if one used the exponential average on the Sensex, the death cross happened a month ago. We however mention the death cross as a lot of traders make decisions based on it.

We feel that the Sensex can possibly to all the way down to 15,000. It closed at 15,965 on Friday, but the path down has a few strong support levels  that could either pause or reverse the down trend. And if the Reserve Bank eases money during the Sensex's journey down to 15,000 we could see a strong bounce. The support zones are show by twin green lines and notice that market has bounced off one of them quite a few times. That support has not yet been broken and must be for a further drop. Given the rout in the US markets on Friday, we could see that level broken on Monday in India.

US Indexes Break Wall of China

Three of the four major US indexes broke the 200-day moving average on Friday. The 200-day average is considered the Chinese wall of support and institutional investors buy when prices come down to it. This phenomenon does not let prices to fall below that level easily. But with the level now broken, Monday's price action will tell us if the down trend has stopped or will continue. 

The  S&P 500 chart shows the index breaking the 200-day average.  The Dow and the Russell 2000, which is the small cap index, are also below the 200-day SMA. Only the Nasdaq 100 is above the 200 SMA. If one looks at the exponential 200 day averages, all the four indexes are below and the averages are sloping down, signaling further bearishness. This does not augur well for the global stock markets. As goes the US so does the rest of the world. 

However as the markets falls it puts increasing pressure on the central banks to ease monetary policy, which could provide relief to the bulls, at least temporarily.