Louise Yamada sees further risk in Indian equities

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Louise Yamada, managing director, Louise Yamada Technical Research Advisors says there has been a slow erosion under the surface of the US markets which have led to their underperformance. In an interview on CNBC-TV18 she says if the S&P500 breaks 1,250, it could move towards 1,227.

However, she adds that if the March lows break, the market may move into a corrective phase. She finds the technical charts indicating more correction in the US markets.

Domestically, she finds that the Nifty still hasn't broken the critical support level of 5,300. "We may have seen some selling in the recent rally but get ready to see further risk in the Nifty and Sensex," she adds.

Below is a verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. For complete details watch the accompanying video.

Q: The problem market has actually been the US. What is it that you see in the charts of the Dow and S&P after the last six weeks?

A: There has been a slow erosion under the surface. So although it's possible here so far we are only off 7% which qualifies as still a consolidation but if the March lows break we will move into a corrective phase.

Q: So what kind of key levels are you watching on the S&P now below which you will start to get more circumspect?

A: The S&P, if it breaks 1,250, it could move towards 1,227 which would really define the 10% corrective phase and possibly 1,135 which would be the August 2010 support level.

Q: Do you think developed market indices are bracing themselves or preparing for a bigger breakdown or technically that doesn't look very likely?

A: That's still difficult to define. I will say that the technical indicators underlying the moves over the past couple of month have been deteriorating and do suggest the potential for more of a corrective phase which may reflect a slowing economy or it simply could reflect the lack of liquidity push from the Fed.

Q: There has been talk as well of money now favoring emerging markets for the second half of the year. Technically, do you see a disparity in terms of performance on the charts of developed markets versus emerging markets?

A: We had seen a disparity in the sense that the developed markets were outperforming the emerging markets for quite a period of time. In particular, the US was outperforming the world for almost a year.

One of the reasons for that is a lot of the global markets have been moving sideways over one-two years and trading ranges that span up to 12-33% ranges from the resistance levels to the support levels would be one reason why the Dow and the S&P moved higher and the US was outperforming the majority of some of the other indices.

Q: What about the dollar index at this point? What do you see on the charts there?

A: The dollar index is in a long-term structural bear market from our technical work. It broke below 75. It almost achieved the 72 level which was the low of a couple of years ago. Right now you are having a short-term kick back but probably as a perceived flight to the safety of the dollar with what is happening in the European equity debt environment.

What's interesting is that each of these reactions in the dollar on each crisis has been less intense. In other words, in 2009, we had a very strong rally in the dollar. In 2010, when there was the debt crisis there was a lesser intense rally in the dollar and this time we are getting once again an even lesser intense rally in the dollar. The downturn comes in place around 76 which I would say is a substantial resistance for the US dollar in any rally.

Q: What's your view on the Nifty?

A: One of the interesting things about the Nifty and we have been sharing our opinions over the past six months is that it has not yet broken the critical support at 5,300. It did come under 5,500 earlier in the year but has recovered. What one has to watch here is the fact that in 2010 the Nifty hit its highs around 6,300 and the recent rally only achieved 6,000. There is the potential here for the first lower high taking place which suggests that there has been some selling into the recent rally.

As and if the price comes down towards 5,300, that becomes a more critical support. Were it to break, you might see risk back to 4,700 which is the support from the 2009 level. One of the interesting things is that all of the global markets have weekly intermediate term momentum sell signals in place. But the Nifty, interestingly along with Brazil both have monthly longer-term momentum sell signals in place. So there might be some further risk in the Nifty and in the Sensex.

Shun infra due to inactive capex, execution: Sanjeev Prasad