Below 18300, next crucial support at 17300: JM Fin

Gautam Shah, Technical Analyst at JM Financial Services believes a failure to make a new high is a negative sign for markets. 18,300 is a crucial level to watch for, but markets may see a downtrend below that.

He sees 5-7% correction over 2-3 weeks if market breaks below 18,300.

Excerpts from CNBC-TV18's exclusive interview with Gautam Shah:

Q: What did you make of the events of the last few days? What it is suggesting about the index next?

A: After many months, a few days back, the markets could not confirm to make a new high and that too after staying around the levels of closer to 20,000 and 5,950 on the Nifty. So, I think what has happened in the last 3-4 trading sessions is clearly not positive for the markets. Because after so many months we failed to make a new high, despite seeing a spectacular come back from lower levels, I think that is clearly a negative sign.

Once we break the support of 18,300, which I think is a very important level for the next few trading sessions, the markets might just get into a downtrend. But more than the local factors and the technical set up out here, globally things are not looking too good, whether the US markets, the yen or whether oil.

All in all, this market is clearly facing pressure on every rise. This has happened after a long time because we are used to correcting, recovering and making a new high, which has not happened in the last few trading sessions. So, I would watch 18,300 very closely on the Sensex and once we break that, we are in for a 5-7% correction, may be in the next 2-3 weeks.

Q: You spoke about a lower top, at what level the other leg is the lower bottom. Are we very far away from forming a lower bottom or is it conceivable that we will complete that pattern?

A: The last time we rebounded last week, it was around that level of 18,300 and that is the reason, in case we were to close below 18,300, it could confirm a lower top and lower bottom for the markets from a short-term perspective. If we were to break 18,300, the next logical support comes in only at 17,300, which is a real big one for this market, because that is the level from where we reversed a couple of times in the month of October, the index freezed at 17,300.

So, it is a huge level from a medium term perspective. But short-term, the moving averages, which has had an impeccable track record in the last 3-4 months, have been broken in the last couple of days.

So, I just get the feeling that breaking 18,300 in the next 2-3 trading sessions might just be a formality and therefore we just want to be prepared for the same.

Q: We have shown a lot of resilience around that 5,500 mark. If you were a Nifty trader, what would you do right now?

A: It is difficult trading the Nifty on a day-to-day basis. You have to keep in mind the gap openings, because of what the US markets are doing. At the same time from an intra-day perspective, Nifty is moving about 100-150 points.

I would keep resistance levels in mind and I would use pullbacks as an opportunity to sell, because let us not forget that the Sensex has corrected 1,800 points in the last 5-6 days, Nifty has lost about 500-550 points.

So, I guess what happened today morning, any move close to 5,600, keeping a provision for 5,700 because of the global markets and use those rallies as an opportunity to sell because you don’t want to trade for 50-80-100 points in this market. You want to take out good 250-300 points and at the same time your stop losses are going to be deeper.

So, closer to 5,600-5,700, this market would be a sell with an idea to potentially cover around 5,100 and as I just said, 5,500 and 18,300 on the Sensex might just be formality in terms of a breakdown.

Q: It has been more resilient than the rest of Asia, though. What would it take to change that call, for the market to defend this 18,300 mark or to go all the way back to its previous high and be able to cross it?

A: What really concerns me is what is happening to the yen right now. This is clearly a study, which has led the global markets, led the US markets in the month of August and what is happening in the last 3-4 trading sessions. I think breaking the support of 109 on the yen, might just mean that it appreciates to a level of 101 to 104. If that were to happen, I think US markets are going to correct and if US markets correct, I don’t think India is going to be a standout performer anymore.

Yes, in the last 2-3 weeks, it has really stood out. India has not lost too much compared to what the emerging markets have done. But going forward, we might not really be a standout performer, because of the technical set up globally and locally. That is the reason I guess, you just want to be prepared with gap openings going forward.

Q: How are some of the other influential Asian markets looking technically, they have corrected far more than us? Are they close to important support levels or are they suggesting more downside, if you look at the charts of may be Shanghai or Hang Seng etc?

A: Shanghai is a very peculiar kind of a market. I really would not combine Shanghai in the basket of India, Singapore or Hong Kong, because Shanghai clearly has a lot of potential to correct from current levels. Most market participants have been talking of a bubble in China; I am not very sure about that. But technically, Shanghai continues to look very week on the charts.

But among the other Asian indices, I think Hang Seng has been extremely volatile, you see 1,000 point moves almost on a daily basis for that market. Most of the Asian markets that have corrected anywhere between 10-15% in the last two weeks are close to trading bottoms and you could always see a minor bounce back, 3-4% bounce back in some of the Asian indices.

But I don’t think that is going to help because in today’s scenario bounce backs are not even lasting on a closing basis. You are seeing it last for a couple of hours and scenario changes very quickly, once London opens or once yen moves in a particular way.

So, they are close to trading bottoms but definitely, I think for concrete bottoms we might just have to wait out for another 2-3 weeks.

Q: What is your sense of the midcaps, particularly hot spaces like power, which has corrected quite significantly? Technically, are they suggesting that they are close to the end of their agony or you see more downside here?

A: Midcap is a space which gives you first hand information that there is trouble ahead. Look at what happened in the last couple of weeks. Largecaps were consolidating, we were failing to make a new high, we were trading around 20,000. But almost everyday you had a few bunch of midcap stocks moving anywhere between 20-35%. Clearly, that was not sustainable.

Even though most market participants would have thought that it was dangerous, it was very difficult to be prepared for a downtrend in the midcap stocks because it happened so abruptly.

I think we have already seen a blow off in most of the midcap stocks in the last 3-4 trading sessions and I think it is going to be very difficult for them to get back to the recent highs. So I think this is a time to really use pullbacks as an opportunity to sell into some of the midcap stocks.

Power midcap stocks have a good potential from a medium term and long term perspective. So that is the sector, which we like. But largecap power stocks could have seen their best for the time being. But some of the other sectors, which we like from a bottomfishing perspective, once the markets correct further, is PSU banks, cement, healthcare and possibly some of the capital goods stocks. 

Q: You are saying at this point it is a prudent call to short the market because that hasn’t quite worked in the past very profitably?

A: Yes, that is the reason why I think levels will play a very important role this time, because for the first time we failed to make a new high, despite the midcaps doing so well. So, I think this time it might just be a bit different and that is the reason you just want to wait for 18,300, may be 5,500 to be broken.

Yes, you could take a contrarian call. You could take an aggressive strategy by shorting at these levels because yen is currently at 107.80. If the view is that the US markets are going to correct, all the way to 12,000, then you might just short the Nifty even at current levels and wait out for 5,500 to be broken to add to your positions.