As part of my work for analysis of India equity market, I must keep tabs on price action of global indices, commodities and other major securities. Intermarket analysis is key for ensuring consistency in analysis accuracy because ultimately the money flow between major market happens almost seamlessly to a certain threshold. This threshold is enough to float or sink retail investor's portfolio in a big way!
Just like it is impossible to place a single piece correctly in a puzzle without looking at the other pieces simultaneously for the supposed bigger picture, similarly, to predict the Indian equity market with any iota of success keeping tabs on the global scenario is also important. Globalisation combined with technology has enabled the movement of funds with more ease than ever before. United States (US) is one ofthe biggest economies in the world and fund managers there invest in the emerging equity markets like India to generate alpha (returns excessive of benchmark index). As a result of this, when it is natural to expect that if/when things start getting rough at home they will be more likely to pull out investments from foreign portfolios. This is the reason why Foreign Direct Investment (FDI) in Indian equity is capped. FDI investments are also referred to as 'Hot Money' because they move out quickly when rallies cool off and their inflow spurs ongoing rallies further. There are several other factors involved, for example- margin call limits in the US, change in economic policy or economic situation in the US and so, which can cause outflow of FDI- but they fall outside the scope of this post.
In my quest to gauge the direction of global equity markets, the primary index I follow is the Standard and Poor’s 500, or simply the S&P 500. It is a stock market index which tracks performance of the top 500 companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices and is well diversified in terms of sectoral participation.
On January 13th, ’22, I noticed weakness spewing on the charts of S&P500 near the level of 4700.
I posted about it on twitter (the micro blogging site) on the same day with the image capture of the S&P500 chart to visually depict the outcome of my analysis which was way more detailed than expressed on the micro blog or even this blog for that matter.
Only 2 weeks in and the global indices began to break again. S&P500 fell to its support level at 4365 which was not-so-coincidentally around the same time when RSI not only reached the oversold level of 30, but also started to stabilise while price was still depicting continued weakness. This created a minor positive divergence between S&P500's price and RSI.
I tweeted about the potential bounce back and upcoming breathing space to the ailing long side participants who at this point were experiencing on average 7-15% drop in their portfolio value from top.
Based on my observation of a small positive divergence on RSI at the point of time when S&P500 retested its 4365 support level on 14th Feb. I put out the outcome of my analysis for everyone that respite was around the corner and with a white arrow pointed towards the potential resistance zone which could be the test point for the United State’s favourite index S&P500.
4460 was my stated level of outcome after analysing past price action of S&P500. If you look carefully there is a faint blue trendline at the tip of the white arrow. It was drawn using the data points of 13th Nov, ’20. That was the first time when this major bull run took a breather and afterwards on 1st Feb, ’21 and 5th March ’21 when the spike lows were formed I simply joined the points using the extended trendline drawing tool. The trendline has acted as support and resistance respectively several times depending on the direction the price approached it from since then. This time again it proved effective and the price experienced resistance as expected- history repeating itself.
After the resistance S&P500 continued to correct further. This time it fell all the way to my initially indicated level of support at 4270 in the very first tweet of this thread.
Here onward, it remains to be seen which direction the index is going to take. In the past two instances when the level of 4270 was approached, S&P500 remained choppy within a range of 2-4%.
I will continue to share my outlook on S&P500 on the same thread on twitter so you dont have to repeat the analysis or even learn the required skills. Follow it here: https://twitter.com/Kavita_Chamaria/status/1481528641272320000?s=20&t=OcKKqTNwMfImjhL6gEcclg
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Kavita Agrawal CMT CFA