India is also potentially heading for the eye of a ‘perfect storm’

In response to a request from one of Trading Tutors’ fans I take a look at the Indian market and I have shown below two charts:

BSE 500:

click chart for more detail
click to enlarge

BSE Sensex:

click chart for more detail
click to enlarge

Almost all other charts fall into the pattern exhibited in either of these two charts.

Firstly a quick note on the BSE Sensex which appears to be ‘just about right’ that is no major trends developing in the foreseeable future. But it is possible it could range trade over a wide band – so we could see trends within this band. It is also worth noting that the index double topped at the late 2008 high.

The BSE chart is the most typical of what we see on numerous equity charts, metals and some currency charts. That is, we are likely to see an attempted recovery in the coming weeks. We have been seeing numerous examples of these over the last several weeks and we are seeing yet another as I write. So just as we see small contrarian moves down in an ‘up’ rally we see the opposite when markets are failing. This is the nature of the beast.

In the BSE chart what we are seeing is the same recovery rally but on a wider horizon – that is a weekly chart. And if we were to translate the BSE wave three to wave four move into a daily chart this could show up as a strong rally. Because this rally is likely to take place over a few months time span – it is conceivable that anything could happen in that time. And one of those scenarios is that the rally could continue.

What we now need to address is probability and we need to question whether a sustained rally is possible and the answer to that right now is ’no’. If governments throughout the world were to get their act together and rebuild confidence then we may see a rally.

Part of the back drop to the current uncertainty world-wide now is the matter of contagion and it appears that apart from China having its own issues to deal with, it is facing the prospect of falling world demand for their products plus the chance of a serious currency war with the USA.

We never know how, when and where wars finish but it could flow to other currencies and affect overall economic when coupled with the other economic woes the world now faces – almost now too numerous too mention.

Now India is of course a growth economy like China but it will not be totally protected from global fall out.

On your question on the 2009 gap – ‘please watch the gap’ – I am inclined to believe that a gap so far away is unlikely to be filled.

So India is also a market where the big money is made on short term trading as this is a perfect storm.

Enjoy the ride

Tom Scollon