Technically Speaking

Despite the financial carnage on Wall Street, the SENSEX ended the week a touch higher after bouncing off the very solid 12,500 support level we have had drawn on the chart for some time.
On the face of it, that would seem like a spectacularly robust performance but the Dow Jones has done almost the same thing. While it is still trading as I write this, it looks like ending the week only marginally lower. All things considered, I find that pretty amazing.
The U.S. cavalry has certainly ridden to the rescue with the authorities taking on some huge liabilities in an attempt to calm the markets. But it is not clear whether this will work or that we won’t see more huge failures.
Early in my career I covered the 1987 stock market collapse and remember well the kind of panic we are seeing now spreading across the globe. The dynamic of the current crisis is very different to that of 1987 but two things never change in financial markets – fear and greed. At the moment fundamentals matter little, the key to the whole thing, and how it unwinds from here, is sentiment.
After the 1987 crash the authorities also threw liquidity at the markets but in the form of sharp cuts in interest rates to counteract the negative wealth effect on the economy. This actually led to economic overheating because stock markets recovered very rapidly after the 1987 collapse.
The sharp recovery was due to companies which had issued equity to either raise money or for M&A, taking the opportunity to buy back stock at rock bottom prices.
A fact well worth bearing in mind given the amount of equity has been issued in the past couple of years.
The chart is the same one I’ve been using for a while showing the SENSEX since the end of 2005. All the important support and resistance levels are shown and you can see just how important that 12,500 level is.
Another interesting development lately has been the correlation between the SENSEX and the other Asian markets, measured on this chart on the left by the MSCI Asia ex-Japan index.
You can see the correlation line is turning positive after being negative for well over a month. The decoupling the India markets enjoyed after the government won the vote of confidence lasted around six weeks, but that premium is now exhausted. The influence of other markets is getting much stronger again.