In late2007 when the US markets began falling and the Indian markets continuedto rally, the pundits fell in love with an exotic term, "decoupling."Their theory was that the Indian markets, no longer dependent on the USmarkets, could continue to rally. We all know what happened next. Thedecoupling pundits ate crow.
The USequity markets are now reaching some important landmarks and given thelessons learned in 2007-08 it would be wise to look at the S&P 500as it's sure to affect the Indian markets. The current rally on theS&P 500 comes from the strength a bullish inverse head andshoulders pattern. Capturetrends had identified the pattern in July2009 and predicted the consequent rally. The report is availabe here:http://www.capturetrends.com/equities/872-inhns.html . The bullishpattern is now nearing completion that can affect all markets globallyincluding India.
Let us lookat the charts of the S&P 500 below. The pink arrows near the bottomright of the chart show the inverse head and shoulders pattern. Thegreen arrows near the bottom left of the chart show the same pattern in2003. Interestingly, note that the distance between the left and rightshoulder is exactly 33 weeks in 2003 and 2009. The markets show a lotof symmetry, but more of that in a different article.
In thechart the pink upwardly sloping line shows the neckline of the inversehead and shoulders pattern. Market technicians will point out that ameasured move is the level to which prices can rise out of an inversehead and shoulders pattern. Conservative technicians state that pricescan rise about 75% of the measured move. The measured move iscalculated by measuring the distance from the head of the inverse headand shoulders pattern to the neckline. Then the same distance isapplied to the point from where prices break out the neckline tocalculate how far the rally can go. The measured move is shown by pinkvertical lines and works out to 271 points on the S&P 500.
In case theS&P 500 only makes the conservative move of 75% it works out to a203 point rally from the neckline.That should bring the S&P 500 toaround 1160 and today the index was just 10 points shy of the target.The area is marked by a yellow horizontal line. The area of the yellowline is significant as prices stayed there for quite sometime in2004-05. The yellow arrows show that the area acted as both support andresistance for the markets. Hence, it's possible for prices to stagnatein 1160 area for sometime and may be even correct.
It isprudent for longs to book some profits after such a spectacular rally.The markets still continue to be bullish as prices are above the30-week moving average, which is used by long term investors todetermine market trend. When the prices are above the moving averageand the moving average is sloping up the markets are deemed bullish andvice versa. But as the inverse head and shoulders pattern is nearingcompletion we'd take some profits on long position and enter the marketagain if the bull continues to stay strong.
Animportant point to note is that Indian markets have turned relativelyweak compared to the US markets this year. Note that the S&P 500 isnear its January 2010 high now but the NIFTY and Sensex are not. Thismeans that in case of a fall the Indian markets can drop lower than theUS markets. Hence. it's important to keep an eye on the US markets atthis time.
George Albert, Editor, Capturetrends