global financial markets-a technical report_dec 2015

Global Financial Markets

A Technical Report

Dec

2015

THE CONCEPT: GLOBAL FINANCIAL MARKET MELTDOWN

V. N. PRASHANTH KUMAR | Financial Markets Strategist

Global Financial Markets-A Technical Report Dec 2015

V.N. Prashanth Kumar

Financial Markets Strategist

Preface to this Edition

Vertical: Financial Markets

Series: Investment Strategy Research (ISR-III)

Title: Global Financial Markets-A Technical Report

Concept: Global Financial Markets Meltdown

The Intent:

To offer Global Technical Picture of the Financial Markets and appraise the shape it is

turning out to be in the immediate future.

To evaluate the vulnerabilities that exists for the Global Financial Markets Meltdown in the

near term through technical assessment of the various instruments, Asset Classes &

Markets.

To get a sense of internals of the Equity Markets especially the Indian Equity Markets and

to understand its behavior in terms of technical perspective at the current juncture.

Constructive & Valuable To:

Investors: Short Term Risk Management strategies may be considered by assessment of

the current Investment Positions to protect their portfolio.

Traders: Manage the Trading positions by taking cautious stance and can adopt short

term investment strategies by keeping track of the overall technical picture of the Global

Financial Markets.

Portfolio & Fund Managers: Adopt appropriate risk management strategies against the

existing Investment Positions and build Short to Medium term risk management strategies

by making shifts between Asset Classes for better returns.

Edition: Dec 2015

Author: V.N. Prashanth Kumar ©

Feedback: [email protected]

mailto:[email protected]




Ideas to this Edition Scientific Assessment

The data generated in the Market are scientifically assessed through consideration of various set

of technical parameters to guide the future price action of a particular instrument or Market by

numerous calculation methodologies. These technical parameters empirically tested and

evolved over a period of time and have become standardized trading tools for the market

participants.

Trading Patterns

The market or instruments/stocks over a period of time generates or forms trading patterns that

are well established and provides direction to gauge the market or a particular instrument on

various parameters and helps in assessment of the current trends or patterns to guide future

trends. Further, the formation of relationships evolve and continue to evolve between various

asset classes/Markets/instruments/stocks. The relationships may be in terms of time gaps, price

ratios, chart patterns, trends, indicators, etc. These behavioral patterns of the

Markets/Instruments/Stocks are tracked, assessed by the technical analysts with great deal of

involvement & experiences over a period of time.

Tug of War

The conundrum of Technical analysis is to navigate the behavior of the market with high level of

velocity & dynamism and to throw up clues about the future price action of the

Markets/Instruments/Stocks. The behavior of the Markets/Instruments/Stocks & scientific

assessment of them does not correspond in terms of periodicity of their movements. Always

there is a time lag between behavior and the scientific assessment. The tug of war between

technical analysts & Markets/Instruments/Stocks behavior continues to cover the variance of the

time lag especially in case of Short to Medium term investment decisions.

Judgement

By inherent nature the technical indicators are not a fool-proof to provide precise picture of

future price action, hence the technical analysts form judgements & opinion based on the

analysis, experiences, historical patterns, sense, perceptions and set expectations of the price

action of instrument or Market/Stocks. The opinion or targets changes according to behavioral

changes in the market and also on periodicity of the technical indicators established.




Synopsis

Part I – Equities

* Nifty 50 * * Dow Jones * * German DAX * * London FTSE *

* Shanghai Composite * * Hangseng *

Part II – Forex

* USD-INR * * USD Index *

Part III – Commodities

* Gold * * Crude Oil * * Copper *

Part IV – Interest Rates & Spreads

* 10 Year US Treasury* * Spreads *

Part V – Volatility

* India VIX * * CBOE VIX* * USD-INR v/s Nifty Volatility *

* Hangseng Index Volatility *

Part VI – Strategic Forecasting

* Equities * * Commodities * * Forex * * Government Bonds *

Part VII – Financial Knowledge

* Theme * * Concept *




Part-I

Equities

Outlook: Bearish

Perspective

The Price channel of Nifty-50 is in a downward trend and the 14 day RSI (Relative Strength

Index), the Price-Volume trend are also looking downwards (See the trends in the Blue lines),

which indicates that the Nifty is heading for a big decline and may hit new lows in coming days

& months. Further, the Nifty in its pullback from the lows of 7539.50 has not crossed the 200

DMA (Day Moving Average), suggests that the bears are in control of the Market.

NIFTY 50

Nifty RSI & Price-Volume Trend

7539.5

0




Perspective

The retracement period considered from the point of view of Medium to Long term i.e., from

28th Aug 2013 where the Nifty has hit a low of 5118.85 and thereafter rallied towards new highs

of 9119.2 on 4th Mar 2015. The Retracement of 38.2% between 9119.2 and 5118.85 has been

achieved on 8th Sep 2015 which is 7539.5. If the low of 7539.5 is broken then there is a high

chance of Nifty retracing to the levels of 7119.03, which 50% of 9119.2 and 5118.85. If the

selling intensifies then the Nifty may drop to 6646 and thereabouts which is 61.8% retracement

between 9119.2 and 5118.85. This co-relates the support that Nifty has taken on 8th May 2014 of

6638.55 and expect the value buying emerges from these levels.

Fibonacci Retracements




Perspective

The Nifty MACD (Moving Average Convergence Divergence) is indicating the bearish signal,

where the MACD has crossed the 9 EMA (Exponential Moving Average) on the downside. Also

the Money Flow Index indicates the buying pressure is not visible although MFI has moved up

higher but the prices have not moved to substantiate the MFI movement. In the above chart, the

co-relation between the two red arrows of MFI and Nifty, where the second arrow of MFI moved

up equally with the first arrow, but the second arrow of Nifty has not moved up the level of first

arrow; indicates that selling pressure is considerably higher compared to that of buying pressure.

MACD & Money Flow Index




Outlook: Bearish

Perspective

The 20 Day Standard Deviation of the DJIA is at historical low, where the market participants are

sensing there is no risk in the Market. Theoretically, this is where the buying should emerge but

historically when the standard deviation hits bottom, the selling pressure is seen and also DJIA

already at its peak and further decline in Standard deviation will only add risk to the Market.

Even the RSI is trending downwards which is visible from the trend line which is indicated in the

above chart. Additionally, the MACD is showing the bearish signal where the MACD has not

crossed the 9 EMA Signal even though the DJIA moved from the support of 17200 to 18000

levels, this indicates bearish outlook for the DJIA in the short to medium term.

DOW JONES INDUSTRIAL AVERAGE




Outlook: Bearish

Perspective

The bearish outlook of DJIA substantiated by co-relating the German DAX’s chart, where the

German DAX’s standard deviation was at historical lows in mid of November 2015 and from

there it has registered 10% decline i.e., from 11480 levels it has come down to 10340 levels. This

is indicative of the fact, that the Markets deceive the market participants as a risk free market

and risk emerges from that point. Further, the MACD and RSI of German DAX indicating bearish

signal where it is trending downwards.

GERMAN DAX COMPOSITE




Outlook: Bearish

Perspective

The London FTSE has formed Double Top pattern which is indicated in the chart (blue line)

above, where the same pattern is likely to emerge in the DJIA chart. This co-relation may be true

once the breakdown of the first support of DJIA is taken out. The FTSE also has declined 9%

from its peak after the 20 Day standard deviation has hit historical lows. The formation of charts

patterns across the European indices are similar and may replicate in developed markets equities

especially DJIA.

LONDON FTSE




Outlook: Bearish

Outlook: Bearish

Perspective

The Shanghai Composite has formed a symmetrical triangle after the serious capitulation in the

markets between June 2015 and Aug 2015, which is highly bearish in terms of future price

movements and severe breakdown is expected in the coming months. Correspondingly, the

Money Flow Index has been declining drastically even as the price action is on the upmove.

Further, the Relative Strength Index (RSI) has hit one year low, where it indicates the future price

action would be on the downwards.

SHANGHAI COMPOSITE




Outlook: Bearish

Perspective

The Hangseng Index which is the corresponding gauge to Nifty 50 is showing severe distribution

pattern over the past 9 Months (April 2015 to Dec 2015). (Please see the Blue Line). This

indicates that market participants are in exit mode from Hongkong Markets. Even the Money

Flow Index and Relative Strength Index are showing the pattern of bearish signals. The

Hangseng Index declined 30% from its peak since May 2015, whereas Nifty has declined 16%

from the peak it has registered in Mar 2015 of 9119.2. These two indexes are co-related in

Medium to Long term view, hence the Nifty has more room on the downside.

HANGSENG




Part-II

Forex

Outlook: Bullish

Perspective

The USD-INR is in a long term uptrend and this shows from the fact that the prices of USD-INR is

faraway from 200 Day Moving averages and not broken since Oct 2014 even though the Current

Account Deficit is substantially lower than what it was in Aug 2013 where the USD-INR has hit a

record high of 68.85. In terms of technical perspective, the Relative Strength Index (RSI) of the

USD-INR has formed a double bottom formation which is bullish signal for future price

breakouts. The shortage of liquidity which is existing in the Global Markets since April 2015 and

it is evident from the charts of 3 Month LIBOR Rates and Credit Spreads where the movement is

significant. This is posing risks to Global Financial Markets and particularly emerging market

currencies where the depreciation may be substantial in the near future.

USD-INR




Outlook: Bullish

Perspective

The US Dollar Index has moved up from 94 to 100 i.e., 6% since mid of Oct 2015 which is in itself

is highly significant and indicates there is greater sense of risk aversion in the Global Financial

Markets. As far as technicals of the US Dollar Index is concerned, the Relative Strength Index

(RSI) is signifying upward trend (see the trendline in Red) where the movement in the Index may

take off to the new levels before the real correction in the Index starts. The risk aversion is

currently shrugged off and the real impact of the US Dollar index upmove in the Global Financial

Markets is not felt. But once the sense of risk aversion emerge, then it may negatively impact

Global Equities, Commodities & particularly emerging market currencies.

US DOLLAR INDEX




Part-III

Commodities

Outlook: Bullish

Gold- Daily Chart

GOLD




Gold & Silver Index- Daily Chart

Gold Bugs Index – Daily Chart




Perspective

Gold has been hitting new lows from past few weeks, but its Relative Strength Index is hitting

higher highs, indicates that there would be reversal of trend in Gold prices in the near future.

And even the MACD has crossed over the 9 EMA signal on Daily charts.

The Gold & Silver Index which is the formation of sixteen precious metal companies stocks

and Gold Bugs Index which is dollar weighted index of Gold Mining Companies is showing

double bottom formation. Also these two indexes are hitting higher highs inspite of Gold &

Silver hitting new lows. This indicates that Investors are buying the Gold company stocks on

the expectation of higher prices in Gold in near future. Further, the Relative Strength Index

(RSI) is trending upwards on daily charts of these two indexes.

If the risk aversion takes centre stage in Global Markets in coming days, the Gold may rally

substantially from here.




Outlook: Bearish

Perspective

Crude Oil prices currently trading below the cost of production and not sustainable at these

levels for longer period of time. In terms of technical perspective, the Relative Strength Index

(RSI) and MACD are trending downwards and may trend even lower in coming days. The Crude

Oil moves in opposite direction with US Dollar Index. The outlook for US Dollar Index is on the

upside and it is expected that Crude Oil will head lower in the near term.

CRUDE OIL




Outlook: Bearish

Perspective

The base metals are in the long term bear market and coming out this would certainly take

longer period of time. The technical charts of the Copper reflecting the same where RSI (Relative

Strength Index) is hitting lower lows and no recovery is in sight. The base metals also behaves in

opposite direction with US Dollar Index and it is expected that the base metals would move

southwards in the near future.

COPPER




Part-IV

Interest Rates & Spreads

10 Year US Treasury Bond Yield

Perspective

The Bond yields has been on the downward trend since June 2015 till the mid of Oct 2015, but

the trend was broken and bond yields has risen sharply since then. This indicates expectation

about interest rates increase in US is on the forefront. The gush of liquidity realized by selling US

Government securities are not flown into emerging markets equities or developed market

equities or Commodities. So, by conclusion the money has been moved into the US Dollar. This

articulates that the investors are sensing the risk aversion in the Global Financial Markets in the

near future.

INTEREST RATES




US 3 Month LIBOR Rate – 5 Year Chart

US 3 Month LIBOR Rate – 1 Year Chart




30 Year US Mortgage Rates

Perspective

The 3 Month US LIBOR rate (Refer Chart : US 3 Month LIBOR Rate – 5 Year Chart) is on the rise

since mid of 2014, where the liquidity in the Global Markets is tightening and picked up faster

pace since July 2015 (Refer Chart : US 3 Month LIBOR Rate – 1 Year Chart). Further, the money is

being funded to real economy especially to the US Housing Market (Refer Chart: 30 Year US

Mortgage Rates), where the 30 Year Mortgage rates have also risen since Jan 2015. Hence,

investable money is drying up and visible in the prices of emerging market equities where the

sell-off is happening since Jan 2015 period. With the interest rates going up in the United States,

further liquidity crunch is expected and if any of the Global risks unfold in coming days &

months then the interest rates may spike up leading to liquidity crisis globally. This will impact

negatively on emerging market equities & emerging market currencies.




Treasury Euro-Dollar Spread (Basis Points)

Perspective

The TED spread is in an uptrend since past two years and the spread has widened from 0.17 to

0.30 suggesting that the risk money is becoming scarce. Further, the volatility has rapidly

increased from Aug 2015 where the standard deviation has jumped to historical highs indicating

there would be increased levels of volatility in the coming days which could seriously impact the

financial markets across the world. Expect the risk money to become even more risker and

scarce due to increasing trend of interest rates in the United States.

SPREADS




Credit Default Swaps-Spreads (Basis Points)

Perspective

The spreads of Credit Default Swaps of long term debts of 150 S&P companies have risen

alarmingly since Jun 2014 and spiked up in the recent months. The spread of CDS have risen

from 60 basis points since Jun 2014. The increase in CDS spreads was the main catalyst during

the financial crisis of 2008 that has led to Great Recession. The consistent rising of spreads

indicates the market is sensing the default of debt by the companies. This will result in the severe

liquidity crisis in the Credit Markets and there would be high chances of liquidity squeeze may

happen in the Global Financial Markets resulting in sell off of risk asset classes. During the

Lehman brother’s collapse the spreads of Credit Default Swaps have spiked up irrationally.

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Part-V

Volatility

Perspective

There are three reasons to be highly bullish on the INDIA VIX. First, the Standard Deviation is at

historically low, where market is sensing no risk. This is the point where the volatility may spike

up would lead to sell off in the Equity Markets. Second, on the Charts the INDIA VIX has formed

saucer formation that may result in sharp spike of Volatility Index. Finally, the Relative Strength

Index (RSI) is on a positive trend and also MACD has crossed over the 9 EMA signal which

positive for INDIA VIX.

INDIA VIX




Perspective

The chart pattern of the CBOE VIX and INDIA VIX is almost similar as both works on same

methodology. The chart of CBOE VIX formed saucer formation before spiking up and also

standard deviation has hit a low in Nov 2015. The MACD and RSI also showing bullish signals as

the uptrend may continue in the shorter time frame and volatility may increase which may

negatively impact Equity Markets globally.

CBOE VIX




Perspective

The comparison of historical volatility of the USD-INR and Nifty tells us the degree of Nifty

Volatility compared to USD-INR is becoming higher since Aug 2013. A small percentage of

volatility change in the USD-INR leading to high volatility in case of Nifty. This suggests that the

Nifty is more vulnerable to USD-INR volatility and this would be keenly watched from the short

to Medium term point of view.

USD-INR v/s NIFTY VOLATILITY




Perspective

The chart of Hangseng Index Volatility has formed saucer formation where the spike in volatility

is expected in the near term. The MACD is also showing the positive signal. This indicates the

Hangseng index is poised for the breakdown and this is also evident from the perspective

expressed about Hangseng markets above. The overall picture of the emerging market equities

suggest there would be severe sell off if there is a Global Risk Aversion.

HANGSENG INDEX VOLATILITY




Part-VI

Strategic Forecasting Forecast for Short Term (1 to 3 months)

Major Asset Class

& Categories

Expected

Relative

Performance

over the Short

Term

Investment

Strategy

(Short

Term)**

Specific

Instruments

Current

Market

Price

(CMP$$)

Expected

Range over

the Short

Term

Equities Emerging Market

Equities

Underperform Sell Nifty50 7650.05 6700-6900

Developed

Market Equities

Underperform Sell Dow Jones 17368.50 15800-16000

Commodities

Gold Outperform Buy Spot-CME ($) 1059.60 1300-1350

Base Metals Underperform Sell

Forex

US Dollar Index Outperform Buy Spot-ICE 97.65 102-105

EUR-USD Underperform Sell Spot ($) 1.0996 1.00-1.04

USD-INR Outperform Buy Spot ($) 67.12 70-72

Government Bonds

US Govt Bonds Outperform Buy

Indian Govt

Bonds

Underperform Sell

$$Current Market Price – As on 14th Dec 2015 (EOD)

** The Investment strategy is based on broader market review & analysis. This is not the strategy for

investment in individual equities & specific equity based or related funds. The investment in these

categories is to be done on the basis of the specific risk assessment analysis related to individual industries,

companies & components of funds & other equity related instruments. The above Investment Strategy

may change accordingly on the basis of the changes in political, economic, monetary, fundamental &

technical of the respective Asset Class & categories within the given time frame which may be impacted

by the Global events which are presently uncertain & unforeseen.




Part-VII

Financial Knowledge

THEME: Volatility

Volatility refers to the degree of variation of prices of any financial instrument over a period of

time measured by the standard deviation of returns. It is measure of uncertainty.

CONCEPT: Types of Volatility

Historical Volatility

Historical volatility is the standard deviation of the change in price of a stock or other financial

instrument relative to its historic price over a period of time. It is also known as realized volatility

or statistical volatility, which measures past market changes and their actual results. Historical

volatility is something that we can observe and measure based on the past price movements of a

security on daily basis.

Relative Volatility

Relative Volatility is the expression of relative measure of price variations between Markets or

Stocks or any financial instruments. Historical volatility measures the prices of particular

market/stocks/instruments on an individual basis, but relative volatility measures the prices

between them. Beta is used as a measure of relative volatility between stocks and indices or

between any financial instruments or indices.

Implied Volatility

Implied volatility is one of the deciding factors in the pricing of options. Implied volatility cannot

be calculated from historical prices of the stock, but rather is the byproduct of an options pricing

model. In simplest terms, Implied Volatility is an expression of the market’s expectation of the

future volatility of the stock price between now and the option’s expiration. Market participants

express themselves about their willingness to pay for option contracts. It is only an estimate of

future prices, rather than an indication of them.




Important Websites

NSE (National Stock Exchange of India Ltd) BSE (Bombay Stock Exchange Ltd)

http://www.nseindia.com/ http://beta.bseindia.com/

SEBI (Securities Exchange Board of India) RBI (Reserve Bank of India)

http://www.sebi.gov.in/sebiweb/ http://www.rbi.org.in/home.aspx/

Disclaimer

The forecast, analysis, views, opinion & perspectives mentioned in this report are purely personal & not related any

organization or individual. The analysis is based on the current global & domestic environment. The targets, strategy

mentioned in this report may not be achieved & changed accordingly in future based on political, economic, social,

environmental conditions & policy decisions through governmental actions or any other events which are

unforeseen and unknown at current juncture. The known & unknown risks may unfold in future which may impact

the financial markets & investments. Assess your own investment & risk management strategy & perform your

research & analysis before investing in Financial Markets. This document cannot be construed as an inducement to

invest in financial markets & the decision of investing in financial markets are solely & wholly related personal

actions of individual or for that matter any other person or institutions & no responsibility lies with author or with

this report, on any financial loss caused by investment decisions based on this report.

http://www.nseindia.com/

http://beta.bseindia.com/

http://www.sebi.gov.in/sebiweb/

http://www.rbi.org.in/home.aspx/




ABOUT THE AUTHOR

Origin

V.N. Prashanth Kumar, Bangalore based finance professional graduated in Commerce from

Bangalore University, also qualified Chartered Accountant-Intermediate & a Certified Accountant

Technician from the Institute of Chartered Accountants of India (ICAI).

Other Qualifications:

Diploma in “Entrepreneurship & Business Management” from Entrepreneurship

Development Institute of India.

Awarded Certificate from Ludwig Maximilan University of Munich (LMU), Germany on

completion of “Competitive Strategy” course with distinction.

Experience:

More than 12 years of in-depth & rich learning experience in Financial Markets as a Trader,

Investor, Analyst & a Strategist in Equities, Commodities & Forex Segments in Indian

Markets.

Also having 12 years of high performance corporate experiences under various fields of

Corporate Finance, Business Operations & Strategy in prominent multinational listed

companies including Mphasis Limited & Bharti Airtel Limited.

Corporate experiences include Financial Reporting, Operations Management, Compliance &

Risk Management, Channel Management, Customer Collections & Relationship

Management, Business Planning & Analysis, Business Engineering, Enterprise Resource

Planning and Business & Strategic Support.

Financial Markets experiences include Trading & Investment (Equities, Commodities, and

Forex), Tax Planning & Investment Advisory, Strategic Advisory Services and Market

Research & Analysis.

Accolades & Recognition:

Received “Top Performer Award” from CEO-Bharti Airtel-Telemedia Business for

commendable performance in Financial Reporting.




Received “Star Performer Award” for conducting Business Engineering on intra-circle

collections management across Bharti Airtel-Telemedia Business.

Awarded “Certificate of Excellence” under Six Sigma Green Belt Project for successfully

spearheading substantial reduction in customer complaints of Bharti Airtel-Fixed line

business.

Received appreciation & applauds from the Investment community on clear assessment of

Global Investment Climate & its impact on Indian equity markets in a report titled “Equity

Investment Strategy-India” which was published in Jul 2012.

Published comprehensive strategic assessment on the Indian equity markets with Global

perspective through a research report titled “Equity Investment Strategy-India” released

in Jul 2014, to provide tremendous visibility & advantage to investment community in

assessing their investment strategies.

The Core

Passion to learn Financial Markets that lead the way in conquering the complexity & dynamism

for the purpose transforming the concept of investment into productive & sustainable value.

Vision: Achieve greater visibility of environment to give a clear direction for taking decisions

through high quality, decisive research in an innovative manner.

Values: Excellence, Integrity, Innovation, Transparency & Accountability.

global financial markets-a technical report_dec 2015

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