Like most market experts, technical analyst Dhiren Sarin, Barclays also feels the market is likely to remain choppy for sometime now.
"The Nifty is certainly looking very vulnerable. The Shanghai composite and even the US equity market has fallen in last three years in a row. We pointed out this bearish seasonality in March and don’t think that seasonality is over in April-May," he said in an interview to CNBC-TV18.
For now, the Nifty may find support at 5,440. However, if it breaches 5280 on the downside then its fall may become severe, he added. The Nifty hit a fresh seven month of 5,487 on Tuesday.
Meanwhile, stronger markets like the US and Japan will continue to perform better. "Monetary policies have made a difference in these markets. If S&P 500 hit its all time high, one may see further buying interest in the short term. In a more convincing manner, we would think that the outperformance trade of US equities versus Nifty remains in place," he elaborated.
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On global currencies, Sarin feels weakness seen in US dollar is temporary and the bullish trend will resume soon and the current rally seen in euro is due to short covering. He sees the Indian rupee breaching 55.15 per USD going ahead.
Below is the edited transcript of Sarin's interview to CNBC-TV18.
Q: It has been looking like a breakdown technically for the market. How have you read it? What kind of levels do you see now for the Nifty?
A: The Nifty is certainly looking very vulnerable. Last month in March, we pointed out the bearish seasonality. It has really panned out as such. We don’t think that this seasonality is over in April-May. It is not just the Nifty. The Shanghai composite as well has fallen the last three years in a row. The US equity market has also fallen in last three years in a row. So, I think the seasonal backdrop is not very encouraging. The Nifty's downside is potentially 5440. The bigger level, 5280 is where the uptrend of the last four-five years has been held. So, a trend line comes in at 5280. If that breaks, then this becomes more severe. For the time being, we are taking a step at a time and we are just focusing on 5400 at first glance.
Q: What do you see on the charts of the stronger markets, the US and Japan because they have been outperforming by a mile. Do you see their outperformance actually stretching out through the summer?
A: Those markets are really fascinating. The two markets, US & Japan are the ones where monetary policies have especially made a difference. So, all the weakening yen impact has actually helped the Nikkei tremendously. We think that outperformance is likely to continue. Similarly, for US equities, the lower yields- US 10-year rates, it continues to drop quite sharply over the last week or two, especially after the non-farm data that came out on Friday.
That’s potentially benefiting the S&P 500, the Dow Industrials. Unlike the Dow Industrial average which has already broken to all time highs, the S&P 500 is still beneath its all time high at around 1575-1576. That is in striking distance. If we start to overcome that, one may see further buying interest in the short term. In a more convincing manner, we would think that the outperformance trade of US equities versus Nifty remains in place.
Q: What would indicate to you that the market is putting up a fight in terms of breaking down even in the near-term? Would you watch for a particular level on the Nifty?
A: Most of the people talk about what are their downside targets, where are their targets but from a technical perspective it is all about risk management. We should be looking at where things can improve, where we can cut our bearish view and start to become more bullish instead. The Nifty needs a little bit of work to do and we need to see a recovery above 5750 atleast. So that’s still a bit away. If the Nifty does start to get up above there, then the outlook will start to improve and we would flip our view. So, really the key is risk management and looking at where things start to improve.
Q: How do you read the currencies now - the rupee-dollar and also the yen?
A: The biggest driver has been euro-dollar in the latest move that we saw in last few days. One of the reasons is the excessive bearish positioning for euro that has developed over the last two-three months. That positioning is being washed out. So, a lot of people were short and have now actually taken profits. This is more on the back of sort of lower yields in the US which makes the dollar less attractive. So, the euro-dollar bounce has given a bit of relief to commodity markets as well and little bit of reason for dollar-rupee to even pullback back despite the weakness in equity markets.
However, dollar weakness is most likely temporary. We don’t think it is sustainable. Ultimately, we think this is a setup for stronger bullish dollar move but dollar-rupee, where that kicks in is if dollar-rupee breaks up above 55.15/USD. We are ultimately bullish but we are just being a bit patient till that level gets away.
Q: Anything in the technicals which is suggesting to you that we might be getting into a bear market kind of setup? Is there something which people are not talking about too often these days?
A: There are few things. It is not a core scenario and it has not even happened yet. These are the things we are looking out for. The vulnerability is the European situation. It is being sidelined somewhat with the move in the yen and the Nikkei. There is a little bit of positive sentiment that is returning in some of these equity markets, but we would be watching the Italian yields, the Spanish yields. If they start to take higher quite strongly – then that’s vulnerability. The other one we would watch is the US equity market. Right now, the world is banking on US stocks still doing better. There has been a lot of money flowing into the US equities. But we are watching some of the volume indicators, the breadth indicators, the percent of stocks above the 200-day average. They are starting to drop a little bit but not significantly enough to suggest that there is a strong top in place.