Global markets have witnessed a correction of late and Dhiren Sarin, Technical Analyst at Barclays believes the US market is facing an all-time high resistance and it is not surprising. He also does not expect a sharp correction in risk assets. According to Sarin, the US markets could correct about 3 percent from the current levels.
Sarin is also hopeful of seeing an uptrend post minor corrections. As far as the Nifty is concerned, he feels the upward move will remain intact and it will find a strong support at 5700. Besides, Sarin thinks financials and high beta stocks are under pressure across the globe. He also sees the euro to move to 1.26 per dollar if 1.30 is not held by the currency.
Here is the edited transcript of the interview on CNBC-TV18.
Q: Is it looking like a globally coordinated correction and technically would you expect to see much more downside for markets?
A: It seems more downside than up at this point. We have seen a global coordination as you just mentioned. It has been a trickled effect that started from the S&P 500 last week. We saw heavy volume on selling on the downside move in the middle of last week, post the Fed analysis that we saw, where a little of the QE rhetoric was taken away. This actually led to a change in psychology which also filtered into Europe.
Now of course Italian elections are a key point here but even before that the market was already bracing for a correction. We must keep in mind that the S&P 500, the Dow are only about 3 to 4 percent from their all time highs. So it is not surprising that markets start to struggle as we reach towards those peaks.
Q: You think the chances are that market might attempt another bounce which then gets sold into forming a bigger leg of the downside that is coming later, but this one may not be very substantial then?
A: We are looking for a pullback but this is not wholesale selling. For example, we can look at some markets like gold and they are still holding up. So it is not the fact that investors are fleeing every asset and moving towards cash. Some assets are still being held on to, like the Australian dollar. These are holding up quite well so we think this is a correction.
It is not a change in trend, it is not a sustainable pullback but we could see another 2-3 percent low on the S&P in the Dow. We could see another 4-5 percent in the Nifty lower and thereafter we would look to buy again.
Ultimately, the S&P 500 and Dow industrials, US equities are still a healthy story for this year. So we aren’t massively negative, we just think that this corrective pullback is long overdue and it is on its way, as of last week.
Q: So just for the Nifty, what is the near term floor that you are looking at, the strong support and the eventual lows that you see it going down to when the eventual correction that you are describing unfolds?
A: We can talk about levels of 5820 which is a near term support in the Nifty and 5800 is also a psychological level. Now we do think that is vulnerable given this global risk sentiment and the cascading effect that we just talked about. So if 5800-5820 gives way, we can think about 5650-5600 but not all these levels.
They are still above traditional trend following indicators like the 200 day average. So the uptrend is still very much in place. It is just that we think that there is a dip towards the 5600-5700 area. Any downside targets about 3-4 percent lower, in the least.
Q: Do you track the Bank Nifty within the Indian market context because that has been hit the hardest and it has traditionally been a huge source of support for the market?
A: Exactly and it is not only the Indian market, it is in the European, it is in the US banking stocks and they have all started to get hit. It is not just banking, the higher beta stocks, the small cap index have started to go through reversal patterns as well. So small caps in the US for example, can go down 7-8 percent whereas the Dow Industrials which is the blue-chips, the large caps, the big companies may go down about 3-4 percent.
Given that the banking sector tends to move in a more exaggerated fashion, more higher beta, we think that the banking sector even in India can start to underperform over the next week as markets take a step back. Do keep in mind, these all are corrective moves and therefore, the banking sector will recover more strongly than even the Nifty index. But, the time is not now.
Q: What remains a reasonable medium term target to place on the Nifty for someone who is looking to take a slightly longer term call on the index?
A: The big hurdle that is quite clear on charts, the peaks that we saw in 2008, a couple of years ago, have hit anywhere between 6200-6400 a few times. That is a reasonable upside move. Once this correction is over, we would look for a base and for the markets to head higher once again. We are just being a bit patient about it.
Hopefully, later this year or in a few months we can see signs of a base and recovery towards those peaks.
Q: Any thoughts on gold and the recent breakdown that it has experienced, what is it telling you technically?
A: It is telling us a lot about foreign exchange. We are seeing gold breakdown in dollar terms but, in sterling and yen terms gold is actually up for the year. So it is quite interesting to see how gold is responding because in a way it is how Fx is responding. In February it is clearly responding to a bullish dollar theme.
So what we really should be watching, if we are watching gold, is to watch euro-dollar itself. If euro-dollar breaks down through 1.30 and closes below that, we think that it can start to have a bearish effect on gold. The big downside level in gold range in the last 16-18 months is around USD 1520 and if that breaks it would mean strong selling. At this point, we are not quite bearish. In fact, we would be looking for a base on any moves lower towards USD 1520.
Q: What kind of targets do you have on the euro-dollar below 1.30 levels?
A: A lot of times price action leads and as technical analysts, we tend to look at price. Once price moves and the story starts to follow. We see that very often in markets. So if euro-dollar breaks down below 1.30, we suspect a lot of the market will start to look towards 1.26-1.27. It has not happened yet, but we hope we would be one of the first on it if 1.30 starts to break.