Bullish on Indian equities for the past one-and-a-half years, trader Atul Suri is a concerned man these days looking at the way technicals have panned out over the last few months. Indian markets have almost erased all year-to-date gains and under-performed global markets this year on concerns of current account deficit, slowing growth and political uncertainties.
Currently, the Nifty is trading just above the critical 5550 support level after yesterday's dramatic rise, but the big question is: Is this pullback sustainable? According to Suri, if Nifty breaks 5550-5500 convincingly, the market is in for a grind to 5200. And that will be very painful because the midcaps are smashed beyond recognition. The largecaps have held out so far but it will be their turn to fall if this 5500 level does not hold out.
"For me the important part in the next few days is to see that whether we are able to come out and take out 5750. That is again about 150-200 points from where we are right now," he told CNBC-TV18 in an interview.
He says it is going to be very challenging hereon for market to move up because there is a lot of call writing happening at 5600-5700. So shorts have also come into the system. "The market will have to clip out these shorts, clip out these 200 DMA and take out the last point. So I feel that the real test area is going to be whether this market can take out 5750," he explains.
Below is the verbatim transcript of Atul Suri's interview on CNBC-TV18
Q: Would you say that there has been a breakdown in the market?
A: Yes, there has been a reason to be worried. I have been very bullish on the market for the last one-and-a-half year. This is the first time in the last two-three months, the way the technicals have panned out, is an area of concern. Any upmove should have higher bottoms and higher lows which is a classical stuff. The last significant level was around 5550 and that is just about where we are. This is just below 200 DMA and here there is a good support for 5500-5550 level.
The market has stalled, but we are having a pullback maybe yesterday and a little bit of today. Is it sustainable? Can it bring about a reversal? Is it the start of a reversal or is it just a small pullback that will get sold into or shorted into? If this level of 5500-5550 breaks, we are in for a very big grind and can head much lower all the way to 5200 on the Nifty and that is going to be very painful.
The market has been in two spaces, midcap, small cap is smashed beyond recognition. The larger caps or more importantly the index heavyweights have held out. It will also be their turn to get hit if we are not able to hold the 5550-5500 band. So, I am concerned with the way things have panned out in the last 2-3 months.
Last year was a great year, we had 25 percent plus return and we are already down 9 percent year-to-date (YTD) over the last three months. The way market is panning out, losing its breadth, small cap, midcap space is totally decimated. A handful of stocks, specially spaces in IT, fast moving consumer goods (FMCG) that are holding the index, so for me the important part in the next few days is to see whether we are able to come out and take out 5750 that is again about 150-200 points from where we are right now.
It is important because if you look back, that was where the last pullback was. If we get there, we will also takeout 200 DMA which is somewhere at the midpoint. It is going to be very challenging because there is a lot of Call writing that has taken place at 5600-5700. So shorts have also come into the system. The market will have to clip out these shorts, clip out these 200 DMA, take out the last point. So, the real test area is going to be whether this market can take out 5750. Until it does that, it is not going to be a very happy story.
Q: What would qualify as a breakdown? Day before yesterday the market closed at 5495, well below 200 DMA, well below the support levels that you are suggesting. Has it already broken down or do you need to see more confirmation?
A: I would need some more confirmation. Even if I feel that this whole pull up is happening, in the short-term a lot of shorts have come into the system and the market is oversold. If we have a pullback, it is very important to see that is it just going to be a short covering rally and not have legs to go further.
The important thing is that you will have pullbacks, any upmove or downmove has a few hundred point throwbacks. So if this is a pull up, is it just a case of short covering, is it just those beaten down stocks that will move up 5-10 percent, people get sucked in and again they get smashed or will leadership emerge?
Overall, in this gloom scenario there are two areas that are silver lining and things I would watch for. The first is the performance in IT. With Infosys results coming in the next few days, IT can hold things up or give a leg to the market. The other leg which is banking, has been broken.
The other silver lining in this whole space is what is happening to commodities. The biggest story for India right now is going to be the commodity space and what will happen to crude. There is no need to emphasise how important crude is for us.
I am going to touch on commodities briefly. If you look at the Commodity Research Bureau (CRB) index which is composite of most of the commodities, you will find it has broken 290 level on the CRB index and could be 10 percent down to around 260. So, you will see a little bit of a selloff in commodities. If you look at the chart of Brent crude, it is at around USD 105 plus-minus. USD 105 is a very important level for Brent. If USD 105 gets broken, Brent could be down to Rs 90.
If crude corrects about 10 percent from here, it could be a big positive for India. With diesel subsidies getting reduced, diesel prices being marginally increased, apart from IT the next big opportunity could be in oil and gas space. After banking, both of them are biggest weightages in the Nifty.
On the whole, I would look out for what IT does, how the IT results are and second what is happening to commodities, specifically to Brent. You are going to see a big crack in commodities and I feel that even for some of the commodity producing countries.
Look at the kind of fall in Brazil, whether it is Australia, Canada, these are great big commodity producers and these markets are giving back a lot. We are at the cusp of having a big fall in commodities. If Brent crude falls to around USD 90, it will be a big positive for India.
Q: For a positional trader on the Nifty, what would confirm to you that the trade is probably towards 5200 and not towards 5700? Would you wait over the next couple of days for another confirmation or the market to drift a bit more? What would be the catalyst for a confirmation that it is 5200 and not 5700?
A: The market in the short-term seems oversold, seems to have a bit of shorts. How it is going to respond in the next couple of days? In case this market pulls up and you just see those infra names performing or some of the PSU bank names performing and leadership does not come in, you need leadership to take the market up. Leadership should come in IT and oil and gas space. If that does not come through or if commodities do not significantly crack, sooner or later we would crack this level. From pure chart point of view, if you have a weekly close below 5500, it would be a breakdown. The important thing will be commodities.
Q: The biggest disappointment for anyone watching the screen is the way the Bank Nifty has started coming off. The sector has become an underperformer within the context of the market, what do you see there?
A: Absolutely. The biggest problem is that often when you have a very large weightage in a sector, when it is doing well it is great, when it does not do well it works like a monkey on your back that it is doing right now.
If you look at some of the PSU banks, they are all getting into multi-year lows and that is very worrisome. Still the private sector is holding out, but if the Nifty goes below 5500 you will see a lot of pain in that space.
In the Dow theory, people look at Dow Transportation as a lead indicator to the Dow Industrial. As far as we are concerned, the Bank Nifty is equivalent to a Dow Transportation which means it is a lead indicator. The kind of underperformance between the Nifty and the Bank Nifty is a significant indicator for me.
So, you continue to see great underperformance till we do not see outperformance from the Bank Nifty relative to the Nifty. Until it makes a swing up, we are in for some trouble. What is worrisome is what is happening to the PSU banks, those charts are looking horrible.
Q: If 5550 does not hold for very long and this pullback fails, will it open the gates for a longer bearish patch where it will not be just 300 points on the way down, but even more damage?
A: We may see 5200 and then a drift which is the most painful space in the market. Bull markets do not just happen in a day, they take months and years of consolidation. The upmove that you saw last year was a one to two year kind of consolidation phase, a lot of effort goes into building the base and then a move.
Even if we get there, whether we get 4900-5300, does not matter, but the kind of drift and pain that market will go through, will matter. It is significant even from the industry point of view. You cannot be unaffected by the industry. We are all a part of it.
As it is you see so much pain in the industry, in the participants, in the investors, in retail, high networth individuals (HNI) that if this pain gets elongated it tends to become septic. So, the concern is whether 5200-5300-4900 is going to be a number, but the pain that we all are going to experience will be tremendous and that worries me.
Midcaps, small caps have been decimated, how much more or they can just keep getting micro destroyed. The larger caps will then take it on the chin where even institutional players are going to get hurt, their net asset values (NAV) are going to get affected. In the middle of all this doom and gloom, keep a watch on commodities because a surprise or a positive for India could be in case of commodities crack and more so if oil cracks.
Q: What do you see on the charts of the Dow? It has been hitting fresh all-time highs everyday. Do you think that will continue through the year or are they approaching a climax? Is that market getting terribly overbought?
A: If you look at the global markets, you will notice that there are just four or five markets that are the oasis, the favourite being Japan. The Dow is doing great. You will find a couple of places like Taiwan or Switzerland doing well.
Even if you look at the global market breadth that is pretty negative, because the whole emerging market (EM) space is bad. Brazil, Russia, India, China and South Africa (BRICS) are bad. The commodity producers, some of which are developed markets are also doing well, so all eyes are on the Dow.
In a bull market, in a market that is at new highs you do not try to pick the top. The only worrisome issue in the Dow is that there is weakness in the broader market. If you look at the Russell 2000, which is again a larger representation of market breadth in the US, it is drifting lower and is not able to show the same kind of jump or resilience.
So, even in the US you will notice that this rally is very front-loaded. It is very large cap led, that is the only weakness, but again an attempt to try to catch the top which is in a ferocious bull stage whether it is Japan or US would be foolish.
As far as we are concerned, it will not have much impact. We have seen how these markets have been on their own path for the last few months and not just India, but many other spaces, specially in the EM space are struggling.
If these markets do well is it good, maybe not, because there is some sort of allocation which is marked out for these spaces. This is because funds are also chasing returns, they are all trend followers and that is why you will find that when markets perform on the kind of flows that come in.
Maybe some of the flows from this emerging BRICS commodity place will go into the two or three top performing market and then they are very big markets with big appetites, Japan and the US. So, breadth is weak, but would not challenge lifetime highs.