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Of Falling Gold and Haywire Sensex

August 15, 2008

It was a very bad week in markets.I am not overly bothered because of one bad week. But becuase it was ‘this’ week. A bad week at the end of the month would have perhaps met with some sort of nonchalance from my side. But in my post “What is Left?“, I talked about how one more good week will put some relief in the markets. But the resistance of 15417-15606 proved to be too strong. So strong that it abrubtly halted the victory march and put a reverse gear on the system.[Figure 1,weekly,Click To Enlarge]

15606 proved to be too strong for Sensex

Strong Resistances: 15606 proved to be too strong for Sensex, weekly chart

Now if we see some price action in day terms, then it just marked the end of a very short lived uptrend. Hardly lasting two weeks-three weeks. Starting somewhere from July 2nd and ending on 13th August, it has set the stage for a fall.

Now is it a bear trap or a real fall, needs to be seen.[See figure 2,daily]

But now Gold is also falling.And that sounds like a good news. Why? Traditionally money siphoned off from capital markets landed either in oil or gold. So when gold rises it sounds alarm calls for capital markets.

A bear trap or a bear hug, needs to be seen. Sensex in daily

A bear trap or a bear hug, needs to be seen. Sensex in daily

And hence, a falling gold can often sound to be a welcome song for the bulls. Although, there may be a reasoning that oil/gold correlation accounts for this fall, but this is not it is. Oil and Gold hold tremendous positive correlation around ~0.8, but in short durations the correlation vanishes to arround 0.113. And thus, I wont really count this fall in gold as a selloff rally due to oil. But perhaps it may sound some reallocation in assets. Or in other words sector rotation.

Following on this fall in gold, dollar also rose on the back of a two week rally. So all in all, it might look that we might see some long term uptrend soon. But this is not to say that, life will return back to normal and the way it was before this mess. We have ushered into a long term, at least a decade long Commodity Bull Run, starting from 2006. And this might cool of anytime between 2015-2017. Which should be the time when the next fall in global economy comes in. [1988-Dow Jon falls,1996- Asian Crisis,2000-Dot Com,2008-Sub Prime, falls nicely into a 7-8 years pattern]

Signing off!

Jump a.ka. Soham

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