I’ve been away for the bulk of the excitement but here are some thoughts about the current India stock market charts and the state of things in general.
The SENSEX collapsed through some very strong support levels in the face of fundamentals which were dire in the extreme. It breezed through 12,500 and is now sitting close to the 61.8 pct Fibonacci retracement of its entire upmove since 2001/2002.
The short-term bearish technical indicators are still in place and the 2006 post sell-off low around 9,700 is acting as support as the chart shows. The 61.8 pct Fibonacci retracement level kicks in around the same area.
Short-term indicators like the Parabolic-SAR, MACD and Alpha-Beta trends are all still bearish. We need to watch both closely in the next few days in any case. It is from the MACD and Parabolic-SAR we will get our early signs of a bottoming out.
On the second chart you can see the correlation between the SENSEX and the other Asian markets, here measured by the MSCI Asia ex-Japan index. It is positive and high and the India market is being very much driven by what is happening overseas. The decoupling the India markets enjoyed at the beginning of September after the government won the confidence motion has gone as you can clearly see on this chart.
The current market declines are a symptom of the economic problems caused by the credit crunch rather than being purely market related. In as much, this is not like the 1987 stock market crash but more like the 1997 Asia crisis and the associated market declines. At the moment the markets may be overacting to the downside but they are struggling to discount economic developments a year or so down the line. Given the outlook is so hazy right now the markets are understandably volatile and incredibly jittery.
I covered the 1987 stock market crash when I was based in London and remember at the time that it seemed like the end of the world and things were never going to recover. The authorities reacted, as they have now, by throwing liquidity at the markets and frankly that is pretty much the only policy response that is effective in the near-term.
One thing that is very noticeable is that the volatility of the market has increased a lot. If you look at the third SENSEX chart I’ve put on a study of the 10-day close to close volatility. As you can see the volatility is currently getting historically very high. You can see the earlier peaks of this study coincide with the end of the 2006 sell-off, the big turn down in early 2008 and the false dawn turn we had in July. High volatility is associated with turning points…and volatility is currently very high.
I publish a daily technical analysis view for the SENSEX, gold and oil at www.reutersindia.net
Technically Speaking
South Asia Technical Analysis with Phil Smith
SENSEX - High volatility means…
Posted by: Phil Smith
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4 comments so far
i have been tracking your technical analysis on markets since more than a year now. Do you really think that in highly volatile market such as current one, market can move in a trend?
The panic button has been pressed. The concerns surrounding the US economy are profoundingly hurting the markets and economies around the world. In such a situaiton it is too optimistic to predict that Sensex will bottom at 9700.
- Posted by bhavesh shahHi Bhavesh, yes it’s certainly true there is still a lot of uncertainty around and even though stock markets tend to discount economic factors one year ahead there could be some surprises around the next corner.
- Posted by Phil SmithThe point about volatility is that it undoubtedly goes up when markets are close to turning points be they short-lived or long-lived. As you can see from the third chart above the volatility of the SENSEX undoubtedly rises when there are turns in the market.
From a short-term trading perspective this is very valuable information as if you are hopping in an out of the market on a daily or weekly basis. For example the volatility peak in July indicated the bounce off 12,500 and while that was a bottom it was a short-term one not a long-term one. The peak in volatility in January this year clearly signaled a long-term trend change, along with a lot of other indicators at the time.
It’s just one tool in the technicals toolbox but I still think it is worth nothing that this latest spike in volatility coincides with the 61.8 pct Fibonacci retracement of the SENSEX’s entire upmove from 2001/2002.
The volatiity is just another number. It is like Price. When Price is high we know it will fall. We don’t know what is the highest point for both price or volatility…
- Posted by ArunThat being said it is better to sell or buy when historic levels are reached. For example the volatility as Phil said is high now that too historically. So we can expect a turn around provided MACD crossover take place.
i have been watching reutersindia.net over a year.
- Posted by Dineshit was very interesting to see the Sensex breaking the level 9700 and going below that level without any difficulty. Surprising ….