Emerging equity is an active asset class. Money flows in and out of them actively. No wonder intermarket analysis between Sensex and Dow assumes an important role.

This week we are looking at Sensex, Dow and their intermarket relationship. Sensex is testing its previous low. The more prices test their previous supports successively, the more likely to break. Even if look at the current formation as an Elliott C wave and not a 3 wave down (Fig. 3), next immediate supports like at 18,000. Weekly momentum and negative Rieki performance cycle (Fig. 1) confirm our negative case.

What happens from Sensex 18,000 is the tricky part. Whether that's all the correction we will have on India? Or is there more to come? Sectorally speaking Indian markets are overstretched. And as a simple rule when monthly momentum reaches historical extremes, the risk is skewed against the buyer.

Above this if one look at ProShares Short Dow 30, we have an extreme oversold Rieki performance cycle (Fig. 2). Rather the Dow DOG is one of the worst performers of our global coverage. Just like everything else, even the short ETF's are cyclical in performance. This seems to be the time to go long on DOW DOG. In other words it seems time to short the DOW.

Now how does this negative bias on DOW link up with Indian Sensex? From Jun 2010 the DOW underperformed Sensex by nearly 25% till early Oct 2010. Since then the DOW has outperformed Sensex by 10% and the Intermarket Rieki trend remains in favor of Dow. The Rieki pair cycle (Fig. 4) between Dow and Sensex has also turned above zero. Today we are studying the intermediate multi week Rieki, but it would be interesting to study the multiyear Rieki between Dow and Sensex and bring more intermarket objectivity between global assets.

Mukul Pal, CMT, Orpheus Capitals, Global Alternative Research