Laurence Balanco, Asian Technical Research at CLSA expects the Nifty to trade rangebound between 4,700 and 5,100 for the near-term.
"For us, base case scenario is that we need to rebuild a basing pattern between 4700-5100 areas. And if we had a slip below 4700, that does see the technical picture deteriorate even further," he told CNBC-TV18.
According to Balanco, the Nifty has unperformed significantly in dollar terms so far this year.
Data on SEBI and NSE showed foreign investors were net sellers of Rs 992 crore in Indian equities on Monday and Tuesday, despite the delay of GAAR provisions by a year, in a week marked by steep global risk aversion.
The rupee opened lower on Wednesday as renewed concerns about the euro zone battered riskier assets, setting up the prospect of continued intervention from the RBI.
Balanco says the Indian currency could move to 56-58 versus the dollar if the 54 level does not hold.
Banking stocks have played a major role in the sharp fall in markets. Investors have been selling banking stocks, especially public sector banks, over renewed asset quality concerns.
Balanco believes the Bank Index could retest its late 2011 lows.
The fall in Europe and the US markets amid political uncertainty in Greece had its affect on Asian market as well. Analysts said that investors were worried that political wrangling may delay the process of solving the EU's debt crisis.
CLSA sees 20% downside risk in Asian markets, Balanco informed.
Below is the edited transcript of Balanco’s interview with CNBC-TV18. Also watch the accompanying video.
Q: Does it look like we are bracing ourselves for a couple of months of pain this summer across global equity markets?
A: Yes, I think since that February peak we have seen one market at a time really putting a short-term topping pattern at least and seeing a breakdown. Now we are starting to see that damage being reflected in the US market, which has been the outperformer from the October lows. So, we are setup and we do have the technical setup at least for a synchronized global correction running through the summer months.
Q: Would that view coincide with what you are seeing on the Nifty, more downside from here after breaking below 5000 yesterday?
A: About a month ago we were talking about the 5,100-5,200 area being a very key area for the Nifty to sustain the move that it made off the January lows. The fact that we broke below that this week and we stay below 5,200 to us suggests the base case scenario that the Nifty is trapped back in the old trading range between 4,700-5,100.Obviously the near-term risk in a seasonably weak period is a test of the 4700 area again.
Q: The question we are asking a lot of fundamental guests is whether in the first two months markets such as India actually made the highs for the year. Technically do you see any evidence of that?
A: If you had a slip below the 4,700 that would mark a very significant peak at the 5,700 rebound high that we made earlier this year. If you look at the Nifty priced in US dollar terms it does paint worst picture than we are looking at in local currency terms, because that downtrend was never broken from the November 2010 peak.
So if you are looking at it in US dollar terms you are still within that downtrend channel and you haven’t seen a break out of that. It has just been in local currency terms that in January we did make the move up to that 5,700 area. So for us base case scenario is that we need to rebuild a basing pattern between 4,700-5,100 area. If we had a slip below 4700 that does see the technical picture deteriorate even further.
Q: Just to understand the global context of the correction though, what kind of levels are you watching on key indices like the S&P now?
A: If you are looking at this 1,350 area which the S&P has been oscillating around for the past few sessions, a break below that gives us a minimum downside target of 1,288. For relative return investors if you are comparing markets across the globe we still see the developed markets are looking at the MSCI World versus emerging market indexes as developed market really dominated by the US market outperforming through this corrective phase and emerging markets where the greater downside risk is.
Q: What about the Indian currency? That’s weakened very sharply over the last few weeks. What kind of levels do you see there versus the dollar?
A: We got the December 2011 highs and significant technical level which was just above the 54 area. The move that we have seen developed of the lows from early this year is a similar magnitude move to the run up that we saw in 2011. So, there are two upside targets we think the rupee can hit from technical terms and that’s up at 56 and just above that 58. So, we are still looking at those two upside targets as potential for this move that we have seen off the early 2011 lows.
Q: You spoke about underperformance in emerging markets, but when you look at the Asian indices what kind of downside do you see in terms of individual levels or the Asia MSCI Index in percentage terms through the course of this summer?
A: If you look at start-off we are basically looking at roughly 20% on some of these markets. I think that’s the worst case scenario. If you are looking at developed markets the topping patterns in the US and some of the shorter term topping patterns in Europe gives you at least 10% downside.
As we have typically seen historically is that the emerging markets do overreact on both down and the upside. So, the worst case scenarios on the weaker market is roughly a 20% correction from the peaks and in some of the developed markets we are talking about a 10% correction.
Q: Is this correction in equities danging with a fall that you expect to see on commodities as well? They seem relatively resilient compared to the cuts we have seen on equities already, things like crude and gold?
A: Crude and gold are the two that have been resilient. If you take a step back and start to look at broader basket of metals and base metals in particular you are seeing the likes of aluminum, nickel, zinc all breakdown from major topping patterns. If it is one sector or one part of the markets that I would be quite concerned about having accelerated the concern is in the commodity space and the commodity stock space.
If you look at the charts of copper, over the past two years we have got a potential major topping pattern developing there with very significant support at USD 3.10 area. If you had a break below that it will be a significant breakdown for copper. So, I would be on the chart patterns at least that we are seeing in the commodity space.
If you are looking at the more resilient side of it, gold and oil have been more resilient. But, if you look at the chart of Brent crude you have got the double top at the USD 128 area and significant support at the USD 100 mark. If you had a break below USD 100 again you would have another major top in the commodity complex being triggered. I would be quite cautious and quite concerned about the price action that we have seen in the commodity complex.
Q: Have you had a chance to study some of the constituents of the Nifty and sensex in terms of which stocks or sectors may breakdown first and take the market low?
A: Like I said, I think materials to me across the region and not only for the Nifty, but across the Asia Ex-Japan region are vulnerable to further downside and breaking off the short-term support levels that they have created. So that’s one space that I would be concerned about.
If you look at the CNX Banks index we have broken like the Nifty has created the lows that we created in the corrective phase into February and that suggests a retest of the lows that we have made late last year, early this year. So very much in line with the market, but the space that we have been flagging for some time was on the material side.
Q: Are you convinced already of the synchronous summer downturn across equity markets or would a breach of certain levels in key indices approve that that should be the view going forward into the next couple of months?
A: We are looking for the final confirmation from your leadership markets. If you look at the weakest markets, they have already broken down and broken key levels and have established new downtrends. If you are looking at your stronger markets and the markets that have outperformed like some of the Southeast Asian markets plus the US markets and the DAX in Europe.
The DAX in Europe broke down this week and we are looking at other breakdown confirmation from the lead markets like the S&P and the Southeast Asian markets in the Philippines, Thailand and Indonesia. They haven’t confirmed the breakdown yet, but we are starting to see those markets rollover.