If 4477 levels get breached, mkt may fall to 4100: K&A Sec

Q: Just for the medium-term not for immediate trade; next couple of days, do you have a high conviction trading opinion or is the picture looking murky there. You cannot make out much what the outlook for the next four-five weeks could be like?

A: The number of ideas where there has been persistent downtrends; those downtrends are kind of looking mature at this moment, sort of overextended and there is a make or break point on most of those downtrends. So to look for short trades on individual stocks is more risky. Nifty view was different. But if one has to look at perhaps some high conviction ideas, of course with a stop loss, then ONGC has given bounce from the low yesterday. If Rs 916 is taken out and it holds off, then there is an extension trade on this reversal on the upside and keeping Rs 916 as a fulcrum, one could look at Rs 1,100 also going forward over six-eight weeks.

Steel Authority of India Ltd (SAIL) amongst the largecap names looks to be decently oversold with reversal patterns in place and keeping about 4-5% stop loss on that. SAIL looks to be another conviction trade for me to go and buy into.

Marred by lack of liquidity and not so much of a clear-cut decisive pattern like SAIL or ONGC; maybe cement stocks Gujarat Ambuja and ACC have perhaps a trading reversal here which can depending on the broad market; how it pans out, continues to produce even a 30-35% rally from here over the next six-eight weeks.

If I am looking at the technology space, perhaps one needs to wait and watch how this broad market turnaround happens and if there is an extension upward breakout trade coming in there looks difficult at this moment. So I would say from the largecaps stick on to ONGC, SAIL, cement stocks; perhaps a bit of Thermax also looks interesting here.

Q: What about crude - are you with the general consensus that it has seen an intermediate top or not quite in the bag yet?

A: Crude is creating a very tricky situation for a short-term trader for today and tonight. The high that we saw so far on crude is in an over extended zone for 2-3 months time frame. Yet at the same time, the pull-back from there has so far perhaps a very short-term trading time-frame, potential reversal day tonight, when Nymex opens and should crude tonight not close near the lows of the day or it closes higher than what it was yesterday - perhaps a very strong bounce can come from here, which can go all the way back to USD 135-136 per barrel levels. I’m not predicting that it will come back but that risk clearly holds for a short seller, who is still at this moment in profit but should crude tonight close, perhaps closer to the lows of the day and then there is an extension of this downtrend coming.

So on a speculative time frame of 4-6-8 weeks, perhaps that USD 135-136 per barrel levels is very tight.  But within the downtrend, we have a potential risk in terms of a reversal coming in. This comes clubbed in together - that’s why I’m saying that it is a tricky day for crude traders and perhaps for that matter for most asset classes. If the dollar Index also has a very high probability downward reversal day coming up, perhaps tonight - if it does not come, then the extension of this uptrend can come. So the Indian rupee on one hand has a negative correlation to the price of crude. At the same time, it also had a negative correlation to the value of the dollar vis-à-vis the broad basket of currency and there is a double whammy there on the rupee.  The rupee chart is looking very overbought. Quite likely today might be a reversal day on the rupee also.

So which way this complex equation will resolve, that answer is going to be perhaps available in the next 1-2 trading days and based on that, the global macro feeling, the local macro feeling, whether IT is going to keep providing the fillip and support to Nifty -lot of these key questions for taking a four to six weeks view will perhaps get resolved with this equation going forward.

Q: A couple of fundamentalist have been suggesting pair strategy obviously that’s for the longer-term, for example overweight Maruti, under weight Tata Motors, overweight Lever, underweight ITC. In the short-term would you work with that kind of pairs strategy for sectors right now?

A: Pair-trading strategy is basically, on-the-surface kind of argument because most of the fundamental risks are very similar - two stocks are long and short. Most of the fundamental risks are taken out of the trade and perhaps it is beta neutral. It works in normal market but when markets are perched at a very close make-or-break point, that break may not come and actually the reversal may happen over the couple of days. But when the risk of such a break down is quite high and at moments of breakdowns, the historical correlation and historical relationships do not work and correlations of all assets, particularly very similar stocks suddenly tend to get very accentuated in narrow pockets of two-three days of time.

So perhaps this is not the best time to find pair-trading ideas as low risk ideas. There is perhaps an unanticipated or unqualified risk in them and risk, which is not accounted for, hits you most. So I would say these ideas are certainly interesting and lot of them have quite confirmed signals but there is no harm in losing a 3-4-5% opportunity cost of opening them after a couple of days, when more clarity comes.