ALPHA

30 APR 2012

The Role Reversal

Once you understand the concept of a trend, the next major concept is that of support and resistance. You'll often hear analysts talk about the ongoing battle between the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). This is revealed by the inability of prices to move above a (resistance) or below a (support). Resistance, is the price level that a stock or market finds it hard to surpass. These levels are seen as important in terms of market psychology and supply and demand. Resistance levels are the levels at which a lot of traders are willing to sell the respective asset. When these levels are broken new levels of support and resistance are established. Its also called as role reversal. Once a resistance or support level is broken, its role is reversed. If the price rises above a resistance level, it will often become support. As the price moves past a level of support or resistance, it is thought that supply and demand has shifted, causing the breached level to reverse its role. For a true reversal to occur, however, it is important that the price make a strong move through either the support or resistance. Now just like everything the significance of a role reversal is determined by the temporal character of the levels. Whether the resistance level is for a month, for a year or for more. Below is the classic example of a role reversal. S&P500 previous at 1,360 resistance levels was broken and now the 12 month resistance has become the support. For DOW, the role reversal is from 2008 and near 13,000 levels. A break at 13,200 previous high will confirm that the new up leg on DOW has started with price targets point up till 13,500 and higher. These role reversals worked for S&P 500 even in 2011 lows at 1,163 levels. How the global equities are managing this role reversal also suggests their respective level of strength and weakness. In case for India, the multi month role reversal level lie at 17,600. A break here would confirm a break of previous resistance and potential role reversal. While on the multi week degree, if prices stay above 17,000 levels, the role reversal can be considered complete and prices can be considered already in a positive mode. A similar reversal level stands at 110 levels for MSCI Asia ex Japan, 1700 for MSCI Eastern Europe. For China the resistance levels lie at 2,500. In case of commodities, prices have no role reversal yet as both Brent and Gold are still below respective resistances at 130 and 1,800 levels. A top commodity market Brazil is also testing key role reversal levels at 60,000. A break at respective levels will confirm that the commodity case remains stagnating and negative.

S&P500. ROLE REVERSAL POSITIVE FROM 1,360 LEVELS

DOW 30. POSITIVE ROLE REVERSAL LEVEL LIES AT 13,000

DOW 30. ABOVE 13,200 GET READY FOR MORE UPSIDE.

S&P500. A PREVIOUS POSITIVE ROLE REVERSAL HAPPENED @ 1,160 LEVELS

S&P 500. POSITIVE ROLE REVERSAL LEVEL AT 1,362 LEVELS

SENSEX. WE NEED A CLEAR BREAK ABOVE 17,600 LEVELS FOR ROLE REVERSAL

SENSEX. MULTI WEEK POSITIVE ROLE REVERSAL LEVEL LIES AT 17,000

a/i W
Sub 17,400 prices can push lower till 16,400 before completing the ongoing correction.

b/ii

MSCI WISE Asia ex-Japan Top Total Return Index

ABOVE 110 THE POSITIVE ROLE REVERSAL IS CONSIDERED COMPLETE

EM EAST EU ex RU PRICE EUR IDX. Counter trend

ROLE REVERSAL COMPLETE AT 1700 LEVELS, AS MACD MOMENTUM CROSSOVER TURNS POSITIVE

BRENT. STILL BELOW KEY RESISTANCE @ 127

GOLD. STILL BELOW KEY RESISTANCE @ 1800 LEVELS

0.382 FIBONACCI SUPPORTS

BVSP. HEADING TO PREVIOUS KEY RESISTANCE NOW SUPPORT @ 60,000

SSEC. CHINA. KEY RESISTANCE LIES @ 2,500

ALPHA

ANALYSTS Mukul Pal Email: mukul@orpheus.asia

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