Gautam Shah, senior VP and technical analyst at JM Financial believes that it is a good time to be adding 'aggressive' longs in the market as he feels that the downside is just about 100-150 points, while the upside is more than 10%.
"We do believe that once the Nifty takes out this level of 5,350, which could happen in the next few trading sessions, then we could start a monster rally that takes the market all the way up to levels of 5,750 to 5,800," he told CNBC-TV18 in an interview.
Rate-sensitive stocks such as banks, autos and realty rose after the Reserve Bank of India (RBI) cut the repo rate by a higher-than-expected 50 basis points, while keeping the cash reserve ratio (CRR) unchanged.
Shah says the Bank Nifty has found a strong support at around the 10,000 levels.
NSE Bank Nifty, the main banking index, reversed losses and rose as much as 1.81% after the rate decision.
Shah expects the Index to breakout on the upside.
India Inc is now full swing into earnings with analysts expecting a mixed bag performance from corporates. In terms of sectoral picks, Shah does not prefer oil & gas space despite its recent underperformance.
The sector is expected to be in the limelight today as energy major Reliance Industries, controlled by billionaire Mukesh Ambani, is expected to report its second successive drop in quarterly profit today, as refining margins are seen slipping to around USD 6 a barrel from USD 6.8 in the December quarter, and as gas output from its offshore fields slows further.
On the currency front, Shah does not see rupee depreciating sharply from current levels.
Below is an edited transcript of Shah's interview on CNBC-TV18. Also watch the attached videos.
Q: What is your takeaway from what has been a rather confusing looking screen? Where do you think the Nifty is pushing now? Is it breaking out of its range or is this looking like a slow breakdown?
A: The markets have been moving in a very tight range of about 200 points with 5,150 on the downside and 5,350 on the upside. Within this range there has been a lot of confusion for day traders or for short-term traders. But I think the medium-term setup of this market is still quite strong. The reason the markets have done what they have in the last few weeks is because of what happened in the month of January when the market moved up 20%. It happened very fast and the markets were looking unhealthy.
Q: What still keeps you bullish on the Nifty?
A: As a technician, I am quite satisfied with the way the markets have behaved in the last four-six weeks. After that huge January early February rally the market required price and time correction. While we have extended on the time correction, front market has not even done a 50% retracement of that entire move. Now we have got to a point wherein the markets are at the climax of this consolidation phase. The last couple of trading sessions have got a few positive figures on the charts which suggest that the markets can breakout.
Also, I do believe that while the markets have stayed in a range it has just quietly climbed a wall of worry. There has been a lot of negative news flow that has hit this market. Whether its IIP disappointment, Infosys shocker, issues on the GAAR front, US markets having corrected about 5% in the recent past and the fact that the rupee itself has depreciated quite a bit from that level of 48.5. So despite all these issues the markets are still trading at 5,300 which I would read as a positive sign. We do believe that once the Nifty takes out this level of 5,350 in the next few trading sessions then we could start a monster rally that takes the market all the way up to levels of 5,750 to 5,800. This is a good time to be adding longs in the market, because your downside is just about 100-150 points and your upside is more than 10%.
Q: What would cause you to change that or re-look that theory though are you waiting for the market to break a certain level on the downside? If it continues to grind then the feeling that it doesn’t have as much strength as you hoped?
A: I don’t think it can grind any more. The beauty of technical analysis is that sometimes the indicators give you an advance indication that the price move is going to breakout and that is the indication that we have had in the last few trading sessions and an indication that has come from some of the sectoral indices.
So while I would be sticking my neck out and calling for a breakout above 5,350 price wise it still has to happen on a closing basis with volumes and with momentum and I think it should happen over the next few trading sessions. On the flip side if the Nifty were to break 5,150 in the next few weeks which is quite unlikely then the set up completely changes in favour of the bears and all the long side bets are off the table. But as of now looking at the medium-term structure there are more chances of this market breaking out and this grind like activity is likely to end in a few days.
Q: What about Bank Nifty that has been quite volatile? It is inevitably the leader in any major move. From this current level of 10,500 where do you see it headed?
A: The Bank Nifty has been in a range just like the Nifty but the bias has been a little more positive for this particular index. Over the last few weeks it has taken good support around the 10,000 level. The way Bank Nifty keeps bouncing back from that level on account of some of these large cap banking stocks gives me the confidence that eventually Bank Nifty will also breakout on the upside. I think there are specific stocks that are doing exceedingly well.
A stock like HDFC Bank hit a lifetime high yesterday, Kotak Mahindra Bank has been a star performer, IndusInd Bank has been a very steady performer over the last many months and some of the PSU banks like State Bank of India are starting to look like they could break out in the next few days. So I would be positive on the Bank Nifty and I believe the figure is already there. We would get a confirmation on a close above 10,650 and once that happen the Bank Nifty can move to a level of 11,200 to 11,500. So banking would be one of my best picks in the market if at all you have to ride the Nifty move.
Q: Reliance numbers are due out later today. What do you see for some of these key and influential oil and gas stocks like ONGC, Reliance off-late even GAIL which has started weakening?
A: Oil and gas has been a big laggard. Even in the month of January and early February when just about everything in the market were doing well Reliance and the entire oil and gas pack was an underperformer. But once again now we have come to a point wherein these stocks cannot underperform any more. I think the level of 700 is a long-term support for that particular stock and we have seen in the last few months how the stock has reversed time and again from that level. I just get the feeling that oil and gas can now end its underperformance and start to outperform if the Nifty itself were to breakout above 5,350. But oil and gas would not be my preferred pick in the market right now. We are still looking at names like banking, metals, infra. I think they have much better setup. I think FMCG and oil and gas could see a very different move from here.
Q: Who would you think are the leaders of this potential move or the monster rally? On whose shoulder does it rest on?
A: I think it has to clearly be banking. I think there are a few major large cap stocks which look good for 15-20% upside from current levels. The metal index after that huge move from 9,000 to 13,000 on the BSE metal index has seen a very good cool off and now it is setting up. So stocks like JSW Steel, Tata Steel have a good setup for a substantial move. Technology would underperform going forward but banking and the ADAG space, I think 2012 is going to belong to ADAG. So this correction that we have seen in this segment in the last few weeks is a golden opportunity because you are going to see gains as much as 40-50% from current levels.
Q: Where do you see the currency headed? It also had a weakening streak and that is not very positive for the stock market. Do you think it may bounce back from here or is it headed to a new low?
A: I don't think it is headed towards a new low. I think 52-52.5 was a zone from where we thought that there could be some stoppage. Therefore we will have to look at the action very closely today and early next week. However this move from 48.5 to 52-52.5 seems to have got completed and once again the charts are suggesting that you could see a reversal. So I don't see the rupee depreciate too much from the current levels. In fact, I would say that there are more chances of it coming back to levels of 49.5-50 and therefore it shouldn’t be a concern for the equity markets any more.