Hello Traders,
I wish you all a happy Sunday and I hope you are enjoying the weekend so far Today, we will have a look at the Nifty Index from India and the USDINR. First of all let me explain to you why I use the Indian currency rupee to forecast the possible move in the Nifty.
That is a so called intermarket relation. First of all, we need to understand that Intermarket analysis is simply the relationship between the 4 major asset classes:
• Currencies: Currency trends define the direction of capital market flows in their currency areas.
• Bonds: Bond trends define the direction of interest rates.
• Commodities: Commodity trends can give us a clue about the current inflation trends.
• Equities: The development of the stock market is a leading indicator of economic development. Which measures the health of an economy.
So in this analysis, we are looking at the currency market (USDINR) vs the Equity market (NIFTY50).
In the chart above you can see the correlations coefficient on the bottom of the chart. We can clearly identify that the currency market (USDINR) has an inverse correlation to its respective equity market (NIFTY). To make long story short. When the Indian currency USDINR goes lower the Nifty index goes higher and vice versa. (Blue arrows USDINR goes lower where at the same time the NIFTY goes higher) that is a ideal correlation.
Obviously, we need to understand that the correlation between USDINR and NIFTY is not 100%. Which basically means, that there are times where correlation divergence happens. A correlations divergence is when both markets run inline to each other, which means when the USDINR goes up the NIFTY also goes up or remains sideways. That is a correlations divergence. I marked it in the charts (yellow areas) both markets move in the same direction. You can also see in the correlations coefficient indicator, the peaks. This correlation divergence occurred the last time in late January 2018. What does that mean you may ask now?
Well, the natural correlation is inverse to each other, which means that at some point the correlation divergence will get back to its mean. Which means after a correlations divergence it will inline again with its natural negative correlation. As we had several times in the past. Have a look at the peaks in the indicator followed by reversion to its mean in the past. I am also expecting in the next couple of weeks to get back to its natural correlations.
Technical Analysis:
Now, let’s have a look at the technicals. You can see in the first chart the USDINR, confirming an inverse head and shoulders pattern. You can see how nicely it broke the neckline and rallied very impulse to the upside. The target remains at around 67.34 which is the projected 100% extension from the head of the pattern. Due to the correlations divergence, where the USDINR rallied and the nifty also rallied, I am looking now at a reversion of the correlation. That means that when USDINR goes to the target of the pattern at around 67.34 the NIFTY Index should turn lower from the 50% retracement at around 10609 for a pullback at least. As NIFTY is at a very decisive area where a pullback can happen. That nicely coincides with the correlations divergence going to its mean. In other words. When USDINR rally in the early next week NIFTY should turn lower from its important technical level. Let's see how it plays out. I hope you enjoyed this analysis.
Disclaimer: Trading is about going with the highest probability, nobody is 100% right and we need to protect ourself in case we are wrong. That is why we need to always use a stop-loss when trading. Trade with care. This my current view
I wish you all a happy Sunday and I hope you are enjoying the weekend so far Today, we will have a look at the Nifty Index from India and the USDINR. First of all let me explain to you why I use the Indian currency rupee to forecast the possible move in the Nifty.
That is a so called intermarket relation. First of all, we need to understand that Intermarket analysis is simply the relationship between the 4 major asset classes:
• Currencies: Currency trends define the direction of capital market flows in their currency areas.
• Bonds: Bond trends define the direction of interest rates.
• Commodities: Commodity trends can give us a clue about the current inflation trends.
• Equities: The development of the stock market is a leading indicator of economic development. Which measures the health of an economy.
So in this analysis, we are looking at the currency market (USDINR) vs the Equity market (NIFTY50).
In the chart above you can see the correlations coefficient on the bottom of the chart. We can clearly identify that the currency market (USDINR) has an inverse correlation to its respective equity market (NIFTY). To make long story short. When the Indian currency USDINR goes lower the Nifty index goes higher and vice versa. (Blue arrows USDINR goes lower where at the same time the NIFTY goes higher) that is a ideal correlation.
Obviously, we need to understand that the correlation between USDINR and NIFTY is not 100%. Which basically means, that there are times where correlation divergence happens. A correlations divergence is when both markets run inline to each other, which means when the USDINR goes up the NIFTY also goes up or remains sideways. That is a correlations divergence. I marked it in the charts (yellow areas) both markets move in the same direction. You can also see in the correlations coefficient indicator, the peaks. This correlation divergence occurred the last time in late January 2018. What does that mean you may ask now?
Well, the natural correlation is inverse to each other, which means that at some point the correlation divergence will get back to its mean. Which means after a correlations divergence it will inline again with its natural negative correlation. As we had several times in the past. Have a look at the peaks in the indicator followed by reversion to its mean in the past. I am also expecting in the next couple of weeks to get back to its natural correlations.
Technical Analysis:
Now, let’s have a look at the technicals. You can see in the first chart the USDINR, confirming an inverse head and shoulders pattern. You can see how nicely it broke the neckline and rallied very impulse to the upside. The target remains at around 67.34 which is the projected 100% extension from the head of the pattern. Due to the correlations divergence, where the USDINR rallied and the nifty also rallied, I am looking now at a reversion of the correlation. That means that when USDINR goes to the target of the pattern at around 67.34 the NIFTY Index should turn lower from the 50% retracement at around 10609 for a pullback at least. As NIFTY is at a very decisive area where a pullback can happen. That nicely coincides with the correlations divergence going to its mean. In other words. When USDINR rally in the early next week NIFTY should turn lower from its important technical level. Let's see how it plays out. I hope you enjoyed this analysis.
Disclaimer: Trading is about going with the highest probability, nobody is 100% right and we need to protect ourself in case we are wrong. That is why we need to always use a stop-loss when trading. Trade with care. This my current view
Comment:
Short Update on NIFTY, it should ideally now extend lower. Here is the 4 hour chart.
Comment:
Nifty is reacting lower. Let's see if we get more follow through
Comment:
Update on Nifty
Comment:
Update on Nifty, it broke the important key resistance, now i am looking at this kind of move
