Nifty may drift towards 5025, says Barclays

Q: Where does that leave the euro/dollar? That’s at the fulcrum of many of the global trades on risk-on and risk-off. It’s, so far, been taking support every time it goes to that 1.20 level to the dollar. But do you see it going there and breaking it this time?

A: That’s a good question. Well, 1.20 happens to be a very big psychological level. So, on the technical charts, it is a big floor for euro/dollar for the time being. If you look at 1.1985, that’s a big level as well because that’s the base of a large topping pattern that’s been forming since 2005. Getting down below 1.1985-1.20, especially on a weekly closing basis, would suggest that euro/dollar can start to pick up pace to the downside.

For the time being, we are little bit neutral within range, modestly bearish. We do think we can test 1.20-1.1985, but we are not going to jump the gun. If 1.20 breaks, it won't be too late to get bearish again. So, for the time being, low in range, watch these levels, a break down through that would suggest 1.1650 next.

Q: What are the volatility indicators suggesting? India VIX has been lying at historically lower levels. The CBOE VIX also seems trapped in a low range. Is it reeking of satisfaction or do you get a sense of any spike in volatility coming soon technically?

A: This is one of the best indicators for fear or complacency from a technical and psychological perspective. Although VIX seems very subdued, it is starting to creep a little bit higher. You throw a 10-day average on the VIX, it is actually pushing slowly higher. The risk is that fear is seeping back into the market.

Now, for the VIX you actually spike higher and pick up pace at the top of the side, the S&P is the one market that we should be watching. Right now, support at 1,320-1,325 is holding quite firm. The market is quite steady, despite this pullback within range. But I do suspect if the S&P gets down through 1,320, especially S&P futures, it would lead to rapid pick-up in the VIX and we’d see volatility start to increase across the board.

Q: Technically speaking, do you think the next 6-7% move on the S&P or the German DAX is on the way down or on the way up?

A: Six-seven percent is quite a strong move. I do think the next 3-4% in the S&P is down. If we do get through 1,320 then we can extend that further and you could see another 4-5% downside quite easily. So, we are taking in a step at a time. In the near-term, yes, I do think the risks are downside. But later this year we do think that things improve. For that to happen, the S&P needs to get back through 1,400 at the very minimum. So, we are watching for that, but that’s likely a story for later this quarter.

Q: Where does all this leave the Nifty?

A: The Nifty is very rangebound. The sweet spot for the Nifty is around 5,350 on the topside. That’s the top end of the range that we have seen for many months. A break through that would see further solid gains. For the time being, given the European issues, I think the effects are becoming more dominant, more prominent in the Asian markets. So, the Nifty can start to drift back towards 5,025. The range essentially remains 5,000 to 5,350.

Q: Do you see that support of 5,000-5,050 holding out for the near-term?

A: I think that is very dependent on two things. One is Italian yields, Spanish yields and two is the S&P. If S&P starts to breakdown through 1,320 especially on a weekly close, I think it is a good chance that Nifty also gets down through that 5,025 area. For the time being, we don’t think that it breaks, but we are watching these indicators. So, we are modestly bearish. The question is when do we pull the trigger and become strongly bearish in the coming weeks. For the time being, we are being patient to see those levels give away first.