Current downtrend likely to continue till early '09: CLSA

Laurence Balanco of CLSA sees further downside in the markets with support for Nifty at 3,600-3,700. He does not see final capitulation in the market just yet. The current downtrend is likely to push on till early 2009, he said.

Crude will maintain momentum only if it moves past USD 143. It could also rise to USD 150-180 per barrel levels if it moves past USD 143 per barrel levels. This along with a weak rupee will only add more pressure to equities.

Dow's charts suggest a move down to 10,700 levels, he said.

Excerpts from CNBC-TV18's exclusive interview with Laurence Balanco:

Q: Lots of support levels have been violated for the last few days, where do you think we can talk about some kind of bottom for the Nifty?

A: We initially thought that the 4,000 level being the August 2007 low would add to some kind of support, but the fact that we slashed through that suggests that this decline has further to go and you are looking at the 3,700-3,600 level, would start to look at some kind of divergence with the momentum indicators for a low to be put in at that level, but at this stage it looks like there is still further downside. I expect this rally that started this morning to fade out. Breadth remains weak.

If you look at the Arms Index, which is still quite is quite interesting, you said capitulation earlier that measures selling pressure and buying pressure taking breadth and volume as a combination, that hasn’t reached the extremes that we saw in January low, the March low and the August 2007 low. So I don’t think we have got to the stage where we have seen final capitulation.

Q: That is an interesting take because some of your peers have been making the point earlier that maybe the market has got too oversold and surely there will be a bounce, do you disagree with that, you have not seen the entire panic play out in the matrix that you track?

A: Yes the Arms Index definitely doesn’t show any capitulation, at this point in time. I would agree that the market does look oversold, but the fact that we are in a downtrend or a bear market is that oversold levels can become more oversold. The fact that you are getting oversold and you don’t see any follow through on the bounce is actually a sign of weakness and that is really the concern that I have, that I haven’t seen the capitulation phase yet, and it still suggest that there is more weakness.

It is interesting at 3,650, the decline from the May peak will be equivalent to the January sell off, so we would have had two legs of 30% decline with a counter trend rally between that.

Q: You would say that from what you have seen right now on your charts and with the data. This fits into the description of bear market and is there a timeline that you could draw for a market phase like this?

A: Typically, bear market phases are shorter than the bull phase. You can check the bull phase from 2003 lows up until to the early 2008 has been a four year period. You are going to see at least the bear market last at least a third of that time, so you are going to see at least 12-18 month period. This negative bias to the market ranging declining market should push on into early next year.

Q: On bad global market days, the Sensex and the Nifty tend to overshoot with its weakness, there seems to be generally a greater degree of panic. When you compare us to other Asian markets or emerging markets, does this one stand out as amongst the weaker lot or the weakest even?

A: Yes it has. In Asia markets that have already broken the March low, Nifty is one and Philippines is the another market that has broken past the March lows. So if you take a step back, you look at the performance that you had from 2003 lows; India was one of the leading markets on the upside and so naturally is going to come to the corrective phase and looks more brutal. But in the bigger scheme of things giving back a bigger gain, so the high beta nature of Indian market is working against it; added to that is the pressure of oil prices plus you got the rupee breaking up as of this morning clearing 42.20; it's been giving an upside of 43.80. So that’s just adding further pressure to the equity markets. 

Q: What is the call on crude after looking at the charts there?

A: Looking at crude, USD 143 per barrel needs to be next level broken to maintain the upside momentum. It is quite interesting during the Asian and European trade that we push up towards that level, but as soon as US opens, we see some selling pressure coming through. So for crude to maintain the upside momentum it has had since August 2007, is that we need to see it push above USD 143 per barrel and above that you are looking at a psychological level of USD 150 per barrel but you get projections up to about USD 185 per barrel.

So in the short-term, if it clears USD 143, I think you are seeing an accelerated move to the upside and support come though at USD 130-131 level and so you need to see a break below that to say that you have got a top in place.

Q: If we do get down to the 3,600-3,700 levels that you are predicting on the Nifty, do you think that is a very strong support which will not be violated or is it conceivable that we drift even lower than that on the Nifty?

A: I think we could see a bounce for a week or two weeks and then another sell off that takes us down to the 3,600-3,700 levels. I would look for some momentum divergence. What I mean by that is that is a Relative Strength Index (RSI) or Moving Average Convergence/Divergence (MACD), any momentum indicator will not confirm a new low on the Nifty Contract, then I would say there is good probability that low is in place or a tradable low is in place.

If that is not the case, the next downside target would be around the 3,000 mark which is more a psychological level and lines up with some lows that we saw in March 2007.

It is difficult to say now that we haven’t got any divergence set up. Most of the momentum indicators are posting new lows, the Indices so without any divergence; I can’t see the levels as they are right now holding for any sustainable period of time.

Q: What’s your own sense on a more medium-term outlook? Do you think we will get to 3,600-3,700 mark and then muddle around there for a bit or are the chances looking stronger for the market to slide from there?

A: What I would look at as per our roadmap is that we get down to 3,600-3,700 level then we should set up a consolidation period. I think if you would have looked at other drastic old shortfalls, what normally follows that is a period of ranging. So I would expect some consolidation pattern to form if we find a low at 3,600 and then we range between 3,600 and 4,000 for a six-month period or even longer, before the market has a base to rally from. So I am expecting 3,600 to hold and am looking for momentum divergence to reinforce that idea. If that doesn’t happen, there is a risk to go down to 3,000, but I wouldn’t be able to tell until we get there with this divergence setup that I have been talking about. 

Q: I do not know if you had a chance to backdate this to what was happening in 2002, but some technical experts are drawing comparisons to that phase for our market. Do you see a lot of similarities and technical position we had then and what we have now?

A: If you look at the market’s behaviour and what I said earlier – market is oversold, but not seeing any sustainable rally coming through and that’s a typical behaviour that we saw from the 2000 peak down to the lows that we find in 2003. So the market behaviour is quite similar.       

Q: What is the Dow’s chart looking like now because that too has collapsed closer to 11,300 kinds of level?

A: Interestingly on the Dow, the 11,750 marked an uptrend, a 34-year old uptrend, so a break of the 11,075 level was quite crucial on the Dow, it really shows a change in sentiment and we are looking for a move down to the 10,700 level.

In the US, the price action on the S&P 500 last night is quite interesting; the fact that it reversed off the lows and closed towards the highs of the session, sets up the conditions for a technical rebound. If we don’t see any follow through on the bounce this evening, I think it really sets up a capitulation phase in the US market.

So if we don’t see any follow through, I think there is quite a bit of risk that that market pushes down to the 1,200 mark.