I have always enjoyed Rohit Srivastava’s (Indiacharts) work on markets and he was gracious enough to share some snippets of his Long short report with all of you
He writes
On US Dollar
“The Moment we start discussing the Fed, interest rates, and the reflation trade, we need to look at what the dollar is doing. If anything has me confused in the last few months it has been the dollar. After the dollar hit the 97.50 mark For the first time I started out believing that it would reverse into a 3rd wave decline. However as the currency did not fall right away and made higher highs I changed my view on the dollar and thought it would have a negative impact on commodities and precious metals. While the weakness in commodities has played out precious metals went on to do their own thing on the back of negative real interest rates. Thus watching the dollar was useful in some cases and not in others. The rising dollar did have the negative impact on emerging market stocks and currencies as anticipated. But now after several months the dollar index itself has really not gone that far. Every time it reaches the top end of the range shown by the channel on the chart below sentiment based on the daily sentiment index crosses the 90% marks and becomes over bullish. Each time it has been followed by a small reaction and another attempt to move up. This pattern has repeated this week and we are again at 92% bullish. Having almost touched the top end of the line the case for a falling dollar is back on the table. We are two weeks ahead of the FOMC meeting that is expected to cut rates. The expectation of lower rates has therefore been putting downward pressure on the dollar while the global demand for dollars in a risk off environment has been putting upward pressure on it. Eventually if a weakening US economy does not respond to lower rates immediately or rate cuts are slow at first the market will anticipate more cuts ahead and it could lead to the resumption of the dollar bear market. “
Commodities,Reflation and Stagflation
What I can say however is that commodity prices that were earlier in decline have started to become oversold some of them are already bouncing back and others might follow. This might lead to a near-term reflation trade. At this point we do not know if the Fed will go into overdrive on rates. If it does then the reflation trade could actually have bullish undercurrents for better stocks and cyclicals. Equities respond differently to stagflation and reflation. A reflation trade can be bullish stocks whereas a stagflation trade causes interest rates to go up and pushes down stock prices. In a hyperinflation almost everything goes up and is a completely different scenario. At this stage we should be ready to deal with the first two.
On INR
What concerns us most though is the USDINR That recently broke out above 69 and started a larger 5th wave long-term. We are now in the third wave of that pattern. From July to September we have witnessed wave 1 of 3 and may now pull back in wave 2 of 3. The depth of such a retracement is not clear however once complete the larger up trend should resume. Keeping an eye on short-term momentum indicators might help in finding the turning points. This might also help us pinpoint the next turn in equities. Wave 3 of 5 goes to 82 and wave 5 itself goes to 90 based on fractal analysis.
On GOLD
The chart has a rising channel that stretches all the way up to $ 4000. These are a multi-year trends. On the gold Mcx chart below prices have reached the top end of smaller channel in wave 3 of 5 near 40,000 INR. The larger channel from 1980 stretches all the way to 63,000 INR. In this case I have data only from 1977 and the wave counts are marked accordingly. 5=1 is closer to 135000 INR long term.
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