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Strengthening Dollar (USD/INR) - Indicating deep downside in equities !!

Across the world, currencies have played a major role in forecasting the stock market trends.Reason that Forex is a good leading indicator to the stock market is the depth of liquidity. Typically, traders will use the futures on the benchmark equity indexes as a forecasting tool for price action in the stock market's active session. This comes with some limitations however as the futures usually have a limited response to event risk and certainly will not give any clues to follow through that could develop after the initial reaction on the open. The currency market, on the other hand, will immediately respond to news or data and show whether the event will warrant a sustained impact. The primary basis for this contrast between the two asset classes is the size of the market (or the depth of liquidity). The Foreign Exchange market clears nearly $3 trillion dollars daily, while even the most active stock index future sees a very small fraction of that activity. There were many small and big reasons for indian rupee which explored new highs in late 2006 and 2007, availability of cheaper credit in the developed world, outflows from JAPAN, Inflow of dollar, Potential economic growth…etc.
When rupee appreciates indices follow, likewise when indices fall rupee feels the heat. RBI has been trying since long to control this instant spike in the value of INR but cycles cannot be changed they take years to form a crest and to trough. Checking inflow of money by sterilization, CRR, restriction on ECB, ban on P-Notes are some of the very popular ways to check inflation/currency appreciation.

Anyways, we wont be discussing the fundamentals here. The previous market action defines the future trend, this is what a technical analyst perceives.

Chart View
Looking at the short-term weekly charts of USD/INR, there is a very short trading range from October 2007 till few days back. A bottom takes a long time to form. Longer the bottom formation, greater the subsequent move after the breakout. The ratio has formed a "Head & Shoulders Bottom" pattern on the weekly and "Cup & Handle" on the daily charts, both are reversal patterns. Accumulation/Volume plays much more critical role in the identification and completion of the Head & Shoulders Bottom. A strong uptrend, usually produces an extreme oscillator reading before too long, in strong uptrends, markets can stay overbought for sometime.

Looking at the long term charts it is clearly the fifth wave move of USD/INR from the bottom made in late 2007,since 3rd wave was the longest one from 1996-2002,i expect 5th wave to sustain above 45.20(61.8% of the fall from high of 2002) in next 3-4 months and test highs (49) of 2002 over a period of 1 year.

Prophecies are based on the previous market action, if the above-discussed relationship holds the truth, we shall see a new bottom in the India stock market. Gold & EURO/USD inverse correlation has already signaled dollar strength,but still we have to watch CRUDE OIL, which is hurting the USD and the world.

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