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Current lows to be a base for next 3-4 mnths: ICICI Sec

Published on Wed, Jul 16, 2008 at 10:43 | Source : CNBC-TV18

Updated at Wed, Jul 16, 2008 at 12:52

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C K Narayan of ICICI Securities feels that most fears of the markets have come true. He is seeing chances of making lows now. The correction of 40% from the top has been inline with expected declines. There are multiple supports at 12,600 levels on the Sensex, he said. Narayan sees signs of momentum divergence at lower levels. All the elements of a decline are in place, he said. The current lows can be a base for the next 3-4 months, he added. He sees see multiple resistance at 17000 levels on the Sensex and 5000 levels on the Nifty.

Excerpts from CNBC-TV18's exclusive interview with C K Narayan:

Q: What is the call from here after the tremendous damage that we have seen on the Nifty ?

A: Tremendous damage has brought about a lot of fear and as the old saying goes 'what you fear happens much faster than what you hope for'. So, what most people feared would happen has actually happened but hthere is always some chances that you will actually form the lows amidst all the gloom and that is more or less what we are seeing on the charts.

All the elements, which are required for making a significant low, are slowly getting into place and majority of them are in already. If you look at the charts from the perspective of the price, you have done something like 40% damage that is in line with the extremes that we have seen in this bull market. If you see the pattern on the allied way front, you have this decline going lower to form this final leg of set of corrective patterns. If you look at the price in terms of supports, you have a lot of clusters of support in and around the 12,600 levels. If you look at time, you are at levels where for this week and for Tuesday it was scheduled for a change in trend. Finally the last element would be momentum, which was the only key which was missing in this whole set and we had the divergence showing up at the new lows which we made yesterday.

So you got price, you have got pattern, you have got time, you have got momentum and finally you also have sentiment. You have Fitch downgrading, you had press reports saying India dedicated funds were facing redemptions, you had this series of rumours about Ranbaxy and you had bank, IT stocks being hammered. Every single stock is being hammered several percentage points. We saw capitulation; big volumes and we have got more than 2000 crore of selling in index futures by FIIs. Almost all the elements are in place, so we are almost done here.

Q: Are you talking about an intermediate base from which we get a nice bear market rally or are you saying that this bear market is over?

A: We are seeing a low which could last for next few months but which is not the end of the bear market. There is a rise of four years plus, if one looks at the length of the bull market from May 2003 to 2008 and a rise of 55 months is not going to be fully corrected in a fall of six months. So, we have more left but from an intermediate sequence. We are somewhere near a low and I would rather be looking at upside than really hunting on the downside.

Q: So how significant an up move can one expect before the next leg starts and what could be the eventual lows that you see on the charts by the time this bear market ends?

A: In terms of trying to put any kind of Index number to it, I would avoid it because it is not just an index number. People generally tend to get hung up on numbers, which is generally not a good thing.

The sequence should happen as and when any significant number is reached whether that number is 12,600 or 3,800 or any other. Unless all the other elements are in place that number remains just a number. We are in the region where a low should form, plus-minus percent I am not bothered because that is more in the domain of traders who need to watch out for absolute bottom. I would look for this low which we have made as of yesterday not to be broken very significantly, so we are very much there.

In terms of what we expect for the upside, the low being in its place is good news. The upside may not be as strong as we all would like it to be. A lot of damage across the board has been done as there are too many people small and big, who are left holding lot of stocks. So, rise over the next four-five months is going to be a laboured affair but the uptrend or the low which we shall put in now will be in place for the next four-six months.

Q: Do you think in a bounce back we could get back to those 4,800 kinds of levels on the Nifty, which would still be a 20%-25% kind of bounce?

A: Most certainly, that is the minimum that you could look at. I would hold out that as a possibility and I am looking for the cluster of resistances, which are there at the moment around 17,000 levels on Sensex and somewhere near about 5,000 levels on the Nifty. So it would not surprise me if the market is trading somewhere there in the later part of the year.

It is all going to be slow, overlapped and laboured rise, frequently pull back because there are so many events that still surround us. So, we will have a laboured rise.

Q: What is your sense or what is your time analysis telling you about how long this whole phase might continue? This fall then pullback then fall again, when will this whole bearish patch end?

A: The minimum time target on the upside for the next upward rally would be somewhere around the end of October. If it stretches out, then we could even spillover into January of next year.

Q: So are you saying by January this bear market is over?

A: No, that was the time period for the rise that I am looking for from now. I am looking for a rise, which will last about four-six months from here. That will probably take you somewhere at the earliest termination of the rise and that could be sometime around October end or if it spills over further, then we could have this rise last all the way until January. Subsequent to that in 2009, we should again see a retracement.

Q: Have you done any major studies of the clusters, which have been leading this fall, the banks , the capital goods and those kind of sectors; what are they suggesting now?

A: If you leave out pharma , all other sectors are smashed. Realty is down 75%, banks are down 50%-55%, capital goods is down 45%-48%. Every sector is pretty much smashed. So when you are coming off such a deep-oversold levels, you are not going to have any sector specific boom. It is going to be single stock specific boom.

The ones, which are most deeply oversold, are the ones, which are going to bounce first. So the first of the rallies will not have the leadership, it will be the stray side counters, which have been sort of deeply depressed. The leadership part will be actually in the second leg of the advance where mood of the larger players will be convinced that we do have a low on our hands and maybe it will be time for us to move money back into the market. So, leadership and quality stocks will move up a little later but the initial run would be the ones, which are deeply depressed. The quality there will not matter, it will be only the oversold bounce.

Disclosures:

It is safe to assume that my clients & I may have an investment interest in the stocks/sectors discussed.