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DOUBLE TOPS


India Fund Breaks Down - Is It Because Of Election Results?

05/18/04 09:06:34 AM
by Ashwani Gujral

Most people think that the Indian market went through a crash because the government expected to come to power lost their elections, but technical charts show a different picture.

Security:   IFN
Position:   N/A

India just went through its parliamentary elections where there was an upset, and the NDA-led Coalition, which was expected to come to power, lost the election. The underdog Congress-led Allies won. Sure, the market was expecting an NDA victory and crashed about 30% from the peak, but is this the real reason? No. What has happened with emerging markets in general, and India in particular, is that the environment for emerging market equities have changed. As the interest rate cycle reverses, money is moving back from the emerging markets to U.S. dollar-based assets. So it is reasonable to assume that the upset win is not responsible for the crash, but that the market was looking vunerable even before the election results. If the interest environment had not changed, maybe the markets would have continued to rally. In a sense the downturn in the emerging markets is similar to the downturn in commodities. So the lesson is that events only act as triggers, and the markets generally do what they were doing anyway.

Figure 1: Weekly chart of the India Fund.
Graphic provided by: eSignal.
 
On the weekly chart, the India Fund has broken down from a double top. Also, as the price made the second top, RSI made a lower top, therefore creating a negative divergence. Now the RSI needs to be confirmed by price action in the form of lower prices. Negative divergences sometimes can exist for a long time before price action supports them. So negative divergences need to be used as a warning more than a signal. The ADX, which is a measure of trend strength, declined from very high levels. It was showing a weakening of the trend before the election results. Both these factors show hugely overbought market conditions that are now being corrected.


Figure 2: Daily chart of the India Fund.

On the daily chart, the India Fund has broken down from a classic double top as well. Incidentally, inexperienced technical analysts tend to take any two consecutive peaks and call them a double top. A double top should have at least 10 days between the two peaks, and should preferably be accompanied by divergence. As you can see, this breakdown is valid, as it occurs on higher than usual volumes. The target for the India fund could be $18.5. This is calculated by taking the difference from the peak of the double top to the neckline and subtracting it from the neckline.

To summarize, markets react adversely to adverse news when they are overbought or looking weak. Similarly, they can sometimes even ignore bad news if they are strong before the event and the environment is favorable. Hence traders need to assess the strength of the market then speculate on events.



Ashwani Gujral

He is founder of AGIP Securities Pvt. Ltd. which offers money management services, live chat rooms (during market hours) and independent technical analysis consultancy. The company has a big media presence from the likes of CNBC, NDTV Profit, and ZEE Business.

Title: Chief mkt strategist
Company: AGIP Securities
India
Phone # for sales: 9871066337
Website: www.ashwanigujral.com
E-mail address: contact@ashwanigujral.com

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