Aug 30, 2011, 03.50 PM IST
In an interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee, Sushil Kedia, President, ATMA said that there is divergence in market momentum and a kind of contrarian force is acting in the market but thatís not a buying signal. Kedia feels that the market will bounce back to 5500-5750 level in the next couple of months.
ďThe market can go about 5700 on the higher side and about 4300 on the lower side. Ultra short term traders should not try to short in the market,Ē he added.
Kedia feels that the market will bounce back to 5500-5750 levels in the next couple of months.
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: What about the current bounce back and how much would you play it for in the index?
A: There is a divergence in momentum in a daily chart of Nifty. During this period, the price forms three lower lows and yet RSI (Relative Strength Index used as a technical indicator), which represents momentum doesnít form any lower lows.
This situation is similar to a car sliding down a hill, gravity itself should have added to acceleration and acceleration is measured by RSI. But acceleration is not increasing while the car is coming down further and that is the first sign of some kind of contrarian (buying) force acting in the market place, while the consensus is moving closer to greater doom and that in itself is not a buying signal.
Now the kind of move, which happened yesterday, has broken past this trend line. There can be a debate whether this market has made a final bottom, has come up or whether this is not merely a technical rally. If we can break it down to intraday kind of a time frame and look at the last move down, which is called as an expanded flat and if we see a particular pattern there, then I would be suspecting Nifty to be around 4960.
If a reversal comes then, I will wait and watch to go out and fight in that debate whether a final low has been seen or not. Ultra short term traders should not be adventurous, trying to short this market until it is broken under 4862.
Looking at the daily chart, if this market was to touch as low as 4670-4680, then that is a right situation for very short term players, who are playing for every 50 points. However, most of us are looking for moves of 400-500-600 points.
One full leg of correction has already got over, but when I talk about the CNX bank Nifty or the CNX IT or the reality, the component sector and stocks, it doesnít look like that the final lows have happened at the same time when the entire structure is a completed and seen a nine month correction.
Going forward, over two and half monthís time frame, I am ready to look at this market bouncing up closer to about 5500 to 5700. This market can break down as low as 3800 and it can fly up as high as 5900. But I see only one percent chance for this market over the next three months to go either above 5900 or come down below 3800.
The more realistic 95% range, which correspondences to about two standard deviations, would be about 5700 on the higher side and about 4300 on the lower side. We are in a bottoming process. The verdict cannot be given right away but if the market slips back to 4650-4670 or continues to fly past up, then there are lots of stocks where solid tradable bottom has already happened.
Q: Are you saying that if you do get a rally to 5400-5500, you would be more convinced that there would be another leg down to 4300?
A: If it goes to 4600, it would have formed much more secure pattern in comparison to that hourly chart on Nifty that we saw. I wouldnít do aggressive long buying for sure because it is merely a technical rebound and over the next couple of days, it may again relapse back to 4670. It is possible but one cannot really judge because there are a lot of missing patterns on the intraday time frames.
Hence, I would say that this is a place where one should be hunting more for long trades on pullbacks rather than trying to cut the trade too fine. If Nifty is going under 4670-4650 by any serious margins with any serious degree of confidence, then perhaps there is a 5-10% chance of that happening. So if 95% probability is loaded towards a bottom, then the opportunity here is to seek firm signals for long trades in a variety of stocks.
Q: What if you donít get meaningful pullback? If we start the day close to 5000, then what kind of a trade are you prepared to put on?
A: At anytime you put in a fresh trade, you cannot be having a 5-10% kind of a stop loss unless and until you are running very large portfolios. Fund managers will deal with situations differently, but for a trader in general, if RSI is already close to the level of 95 on the intraday patterns, then you will have to just sit out and wait for the right time. Itís a market to be bought on pullbacks and it doesnít look like that we are going to explode right away in a hurry that it will keep the market running, it doesnít happen that way.
Q: Which sectoral index looks like its going to pop the hardest between faces like IT, banks and infra?
A: The banking index has had fallen the most. One shouldnít say that banks have been acting like the high beta names but they have had the largest amount of swings over the last nine-ten months. So in terms of the largest rebound, if Nifty keeps going up to 5,500-5,700, then this chart in the CNX bank index, even though it has a potential to go all the way up to almost 12,000, can be 11,800. Hence, it would be a large interim rally if Nifty goes down and backs out again to 4,300 or lower than that.
Around that time, CNX bank index will probably form not lower than about 8,000 and will come to those calculations. So, the banking sector will see the highest outperformance. State Bank of India is running all the way to Rs 2,580-2,600, which is nothing unusual because the stock has seen those kinds of fluctuations and is followed by the metal names.
Also, there is nothing fundamental about metals but this fall was not very well anticipated by the fundamentals. Metals are likely to have a solid bound. But I am not getting convinced on the IT sector with the kind of patterns, which are showing that a rebound is possible beyond 6,245-6250.
In the realty space, a rebound is possible close to 20% as final lows have not happened. A double bottom, which broke here, should act as a serious resistance, on the CNX realty index at Rs 245-248. So, everything will rebound including Reliance, which is likely to make a 30% zoom. It could also be a case that Reliance pops out by 20-22% and peters off again. So broadly, almost everything should provide a good strong rally over the next two months.
Q: What about Reliance, how much can it add to Nifty?
A: Reliance has a weightage of about 15% and if it rebounds about as much as 30% and 5% on Nifty from current levels, then it alone can add up to 250 points. It sounds a little stretched to say that Nifty can go up to 5800-5900 that is 250 points due to Reliance but the same momentum divergence, which we were talking about, exists here in Reliance. It can go all the way up to Rs 850-860, which is about 25-30%.
Yesterdayís move in Reliance Capital for the entire day was within the range of the movement of the previous day and that is typically a very potent formation for large move to happen on either side. So along with the news that has come in, if we make a break past Rs 80, then the stock could be as good as Rs 98 or Rs 100. In percentage terms, this sounds like 25% with the volatility you have. So technically, one will conquer with a view that there may be large rebound in these names but they all are avoidable on a risk-adjusted basis.
Q: If you had to trade L&T or SBI in this pullback, which one would you go for?
A: L&T has a very interesting chart. The stock can rebound all the way back up to Rs 1800. However, SBI has much more clearer pattern for the 25-30% kind of up move post which the slide will come back in the next set of lows irrespective whether Nifty goes to 4300 or closes to 4000 as this huge large rally does not look like to be more than 5-10% lower than the current low levels.
However, in L&T, I see a very risky pattern. It is a head-and-shoulder pattern that has formed over a period from May 09 to September 11. So it is almost a two-year long head and shoulder pattern that has formed and we have come close to that neckline and now we are going to rebound back from here. If you are not going to trade due to the fear that this neckline will break, then it will be a skill for a very short term trader to do it.
This week, we will see this pattern finding tremendous support. Momentum divergence is rebounding back and right up to the Rs 1760 area is where I see current rally going up. It may once more come down to Rs 1500 and can go back again up to Rs 1850. But eventually in the next couple of months, wherever L&T will top out, I will take one third of my short positions there. Once Rs 1500 breaks out, I will buy somewhere in April or May 2012. However, I am ready to see L&T going down to Rs 700.
Q: We did not discuss any metal stocks. Will they see a technical rebound?
A: The rebound has begun, but at the same time even if there is a large percentage move, it will be a rebound only. If you see the chart of Hindalco, from Rs 130, it has started showing the first round of a bounce back.
However, under any scenario, this current move will be able to take it past Rs 173. It is not a prediction of Rs 173, which is the outer limit. Whether the stock stays under Rs 173 or goes to Rs 160-165-158, it will crack out again and form a further new low, so there is a large interim rally here.
Similar kind of a picture we can see on the chart of Tata Steel. The stock moved up 25-30% to Rs 540 at this point, where there were multiple supports, but then, it broke down with a gap. So from the latest level of about Rs 411, it goes to Rs 550, which is a humongous large move. But in the long term, I would say that the bottom is not seen yet.
Disclaimer: The above views are the personal analysis of Sushil Kedia, President ATMA and do not reflect any opinion of ATMA
To know more about ATMA, please visit http://www.atma-india.net/
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