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Russian shares likely to fall

Price at time of writing – 1115.

Vladimir Putin may have won some diplomatic battles in recent years, but I think he has one very obvious weakness.

Russia’s hardline president’s apparent lack of understanding of economics and financial markets has cost the country dearly since he regained the presidency in May 2012. The Russian RTS index, a dollar-denominated index of Russia’s leading companies, immediately greeted his return to the presidency with a 25% fall, and I think it is about to cost Russia a lot more.

Since May 2010, the RTS index has been supported by the closely aligned G1 and G2 levels. These two levels - the most influential in all Gann-theory analysis - are positioned at 1250 and 1265 respectively. Each bounce from this support has been progressively weaker, however, and yesterday’s break below the G1 level has inevitably led to a much bigger selloff. The neckline drawn from the first of these re-tests of 1250 has been breached decisively, and the index is now targeting the next cluster of support centred around the G3 and G4 lines. This support can be defined as the band 625-650, allowing for a huge 41% downside opportunity from yesterday’s closing level.

Not only are Russian shares likely to fall heavily in absolute terms, but the currency will probably depreciate further too. The first mistake panicked central banks often make when faced with a currency crisis is to raise interest rates. That Russia raised rates yesterday is, I believe, further evidence of its lack of understanding about the way today’s globalised markets work. Just as the rouble did not fall due to interest rate differentials, I don’t see it recovering on higher rates either. It will merely add to the troubles that lie ahead for the Russian economy.

Recommendation: sell. The longer-term target now becomes the band 625-650. Only strength above 1265 will avert this outcome, and can be used as stop-loss policy.

Russian RTS index chart

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