Aug 08, 2011 05:31 PM IST | Source: CNBC-TV18

Next stop, 4700 Nifty: CLSA's Laurence Balanco

Laurence Balanco of CLSA said the Nifty has slipped below its key support area that was running from 5100 to 5200.

Standard & Poor's (S&P) downgrade of US rating to AA+ from triple-A has spread panic across markets and there is a sense of nervousness of a possible global downturn.

Back home too market continued to flounder with major indices falling like nine pins. The NSE Nifty had shed 120 points in afternoon trade, while the Sensex was down over 400 points.

Speaking to CNBC-TV18, Laurence Balanco of CLSA said, the Nifty has slipped below its key support area that was running from 5100 to 5200. "This level dates back to the peak we saw in 2010 and the lows that we saw this year," he explained. 

The next significant support for Nifty is at 4,700, said Balanco adding, there is a risk of further losses down to 4,200 areas. "We are starting to see downside acceleration in global markets," he said.

Balanco expects to see lower levels across global markets.

Also Read: Do not see 2008-like crisis, Nifty may hold 5K says Damani

Below is the edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also watch the accompanying videos.

Q: Congratulations you have got that call right on the S&P and on the Nifty, it did turn back from the levels that you mentioned. Where from here you reckon?

A: Unfortunately, Nifty has now slipped below the key support area that was running from 5,100 to 5,200. These levels date back to the peaks that we saw in 2010 and obviously the lows that we saw earlier this year. On the technical side, we are now seeing a Head and Shoulder (pattern) triggred for the Nifty. For the Nifty, next level that we are looking at is a slip down to 4,700 levels with the risk of even further losses down to the 4,200 area levels.

 We are starting to see downside acceleration in global markets. Even though we are at oversold levels - there are no signs that the downside momentum is starting to slow. We can see some short- term re-bound but we are looking at lower levels across global markets. The next stop for the Nifty is around the 4,700 area.

Q: As you pointed out this last fortnight has been different from the rest of the year and that things have moved very fast. How soon do you think the market maybe faced with the proposition of 4,700?

A: If you look at seasonal effects - August and September are the single worst performing months. For the the Asia ex Japan region the average return over those two month period is a negative 3% and that goes back to 1988. It is not to dissimilar in global markets. The rate at which we are declining here, we could see 4,700 level quite easily by the end of August.

Q: What is the corresponding chart of the S&P looking like from this level of 1,200 where it is perched now?

A: In the short- term we are oversold. Looking at the Head and Shoulder pattern, the S&P triggered with a break below 1,250 level. The minimum downside target is of 1,140 level. Looking at levels just below that, the next support area can be around 1,050 mark and then 1,000 mark. It a 50% retracement of the advance from a 2009 lows to 2010 peak. In the near term, S&P might try and find some kind of foothold at the 1,140 area.

Q: The only good news that has come along with this correction at least for India is the kind of breakdown we have seen in crude. Do you think that looks like a durable pull that we have seen on crude? What kind of prices do you think it may now range between?

A: Like most equity markets, from a trading aspect we have seen intermediate term peak put in place by both WTI oil and Brent oil. The WTI has led to a downside and it has met our first downside objective of USD 84 per barrel. Just below that we have obviously got eight years of support at USD 75. That would be another major move downside target we are looking at.

Looking at Brent, the Head and Shoulder that we have seen triggering the Brent contract gives us a downside target of USD 92. We do think there is more downside to oil. The positive effect of crude prices coming off for the Indian markets will take some time to come through the system. The correlations can break down when one sees synchronised sell off. So, one can look at the correction and intermediate term peak in oil taking effect for equities at a later stage this year.

Q: Do charts of heavyweight stocks like Reliance correspond with the kind of picture that you are painting for the Nifty?

A: A: Unfortunately, if you look at the charts of Reliance, it has been range-bound for 18 months. It broke down below key support areas. The consolidation pattern seen over the last 18 months suggests further downside for Reliance.


Q: Technically, are you drawing any parallels between the 2008 experience and what markets are going through now? Do you see any similarity in patterns or performance?

A: We had lot larger and more significant topping patterns in 2007-08. The topping patterns put in place over the past six months in Asian and US market are of smaller magnitude. Among other market, we would focus keenly on gold as that is still in an uptrend.

We saw gold correct in the liquidity scare of 2007-08. The fact that gold is starting to accelerate gives us some security that we have not seen that liquidity scare like we did in 2007-08. There is still potential of that happening if we see gold roll over and break down and we see asset markets across the board, from gold to the equities, correct. We will be quite concerned that we do have another replay of the 2007-08 roadmap.

However, at this stage, we have not seen inter-market work line-up like it did in 2007. Also the other point, like I mentioned, the topping patterns are actually of smaller magnitude now than they were in 2007-08.

Q: Is it smacking off a bear market to you after the breakdowns that you spoke about in global equities?

A: It

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