Reversal in Stock Markets.. Eventually Imminent ?

The US markets lately have been butchered by a much needed correction. All major US stock indices and many high-beta tickers had run-up, very much and so this correction to sanity was needed. Now is this a cyclic correction or a much large sell-offs for an impending recession, needs to be seen. The news from various fronts (RealEstate Builders, CDO and subprime affect, Banking, retail, consumer sentiment, John Chambers, Tech, Energy Prices) has not been very encouraging. And so the corresponding market reaction.

On the other hand, the Indian Stock market is stuck (in +19K range).. resilient and resistant, from factors like – strong local sentiment, growth projections; and money inflow (from FIIs and NRIs) impacted by currency turbulence on US-Dollar and currencies around the world.

But after all this large run-up and run-down, what do we expect next ?

Over next few weeks/months, I expect a reversal. Here is what charts have to say.

The US indices are showing signs of too much negativity. The RSI, Stochastics, MACD and ADX/DMI lines clearly indicate to reach a window when reversals typically happen Another factor that could play in to a bounce or a quick rally before yearend. That is, for fund managers to show good returns for the year 2007, the markup rally and then some profit taking is expected before the year ends. Else fund managers wouldn’t be able to get good alpha this year.
Only one factor can take markets t further trenches is that this recent sell-off turning out to be a ‘recession effect’ and not just a cyclic correction. Some indices have already reached short term (1~2 yrs) support levels, but further need to correct to reach long-term support and to negativity levels seen over last 5~6 yrs.. So a bounce from current or coming week levels is mor likely, before recession effect takes it full toll on the markets.

On Indian Bourses, clear divergence is seen on BSE chart, lower {RSI, Stochastic , DMI } seen on every attempt to make new high in 19K+ range, the markets are wishy-washy in 18.5~19.5k range and weaker on every runup. This is an indicator to stay away (not yet short) unless a new uptrend is clear. A reversal to 15K levels is more likely than runup, but I would let the markets show the right direction before urging anyone to keep any money into the volatile Indian market.

There is an interesting article on what’s more likely in Asian markets over next few months @:

http://www.gloomboomdoom.com/subscribers/download/071001.pdf

Enjoy the game.