Next leg of downtrend has begun: JMMS Tech

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Technical Analyst, Gautam Shah of JMMS Technicals believes that the next leg of the downtrend has begun. He sets 12300 on the Sensex as the trading bottom. According to him, Index heavyweights look weak on the charts.

Shah expects to see 11000 on the Sensex and 3200 on the Nifty over the next two months. He feels that lack of buying rather than selling will take a toll on midcaps. He also adds that some technology stocks could lose 12-15% in the next 3-4 weeks.

Excerpts of CNBC-TV18's exclusive interview with Gautam Shah:

Q: How do you read the pull back of last week and how have events unfolded since then?

 

A: I guess after five consecutive weeks of gains, one week of losses; one week of gain is pretty much within the framework of a downtrend. I think this is a market, which is behaving very similar to what happened in May '06. I guess that's the way we are going to resume the next leg of the downtrend.

 

Quite interestingly, we have not even retraced 50% of the losses in the last one week. Yes, a 1000-point recovery on the Sensex looks good on paper. But actually, in percentage terms, we have not even done 50% of the losses. If you compare that with some of the other Asian indices, which have actually moved back closer to the highs of February '07, it tells you the kind of underperformance our markets have been.

 

We were closely watching the level of 13,300 on the Sensex, 3,900 on the Nifty, last Thursday and Friday. On Monday, we reacted from 13,300 and we believe that unless this is crossed on a closing basis, we are still maintaining our short-term target of 12,100, which should be achieved in this reaction.

 

Q: So you are saying that the market has started its downmove once again after that one week rally, or would you expect the market to spring some surprises or maybe move back once again before falling?

 

A: I think it seems to have resumed the downtrend. Why I am talking about May '06 is because we were at index freeze at 9,800, we recovered 1200 points, we moved back to 11,000-11,200 and then moved down all the way to 8800 to confirm a reliable bottom. I think something similar has happened - 12, 300 is purely a trading bottom for this market.

 

Yes, we have recovered 1000 points, but I guess the way we have reacted in the last couple of trading sessions and the fact that some of the index heavyweights are looking extremely weak on the charts, I think the next leg of the downtrend has begun that should take the market below its recent low of 12,300.

 

Q: If you were taking a trading call on the Nifty, would you look to initiate shorts at this level or do you think a bit lower?

 

A: This is a market which has become very difficult to trade on a day-to-day basis. I say this because on one particular day, you might have the Sensex up or the Nifty up 50 points, we might close at the day's highs. But on the same evening, if the US markets were to be down 100-150 points, obviously you will open lower and you won't even get an opportunity to place a stop loss.

 

So I think one should stay away from a day-to-day trading perspective and take a little broader call. A broader call would mean about 3-4 weeks and from that point of view, keeping a stop loss above 3,950, we can expect a level of 3,500, which is a good 250 points away from where we are today. 

 

Q: Even so in the last few reports seen from you, you haven't put out a medium term target for the market, why is that? Is it that the charts are not showing you a clear direction in the medium term?

 

A: Earlier, when we were at about 12,600, the scenario was very pessimistic and I had mentioned that I do not want to come out with a medium term target right now because the market is looking slightly oversold and I wanted the markets to pull back a little bit. We saw that pullback taking place last week.

 

We tested 13,300 and I guess the way we are behaving today and the way the weekly closing is going to be this Friday, I guess in my report next week, we shall come up with the medium term target because now there are confirmatory triggers that in the next couple of months, we should be seeing a level of 11,000 on the Sensex and 3,200 on the Nifty. 

 

Q: What's the call on the midcaps from here? Have you studied the midcap index or any of the popular midcap charts? What are they indicating?

 

A: Midcap is a space which really scares me off. I say this because if the markets were to fall 15% from here, and when I look at some of the stocks specific midcaps, which have already corrected 30-35%, it is very difficult to believe that they could go lower from current levels. So I guess it's mainly because of lack of buying than selling, which is going to take the midcaps down from here. Yes, if the Sensex has to fall 15% from here, the midcap index will have to lose 20-22%.

 

Q: The last time we spoke you actually had a contrarian call on technology and expected to see weakness. How much more do you think for some of these frontline tech stocks?

 

A: I guess clearly there is something wrong somewhere in technology because it is very interesting. Last week, you saw the Sensex gain 1000 points and Infosys just did not move. So I guess there is something on the charts, which suggests that some of these technology stocks could lose as much as 12-15% in the next 3-4 weeks, we are maintaining our view.

 

Therefore, investors holding on to some of the technology stocks can either just get out, maybe buy back 15% lower or look to hedge their positions because technology and telecom, which have been the best performers in the last one year are likely to be the worst hit in the next few months. 

 

Q: Our markets track the global markets quite a bit. What do you see from some of the indices that you might be tracking technically in the US or in any of the other Asian markets? What are they suggesting?

 

A: Ours clearly has been one of the weakest market in the last few months - from June lows to February highs, we did not do as well as some of the Asian markets. Even in February till now, we have corrected much more than some of the Asian indices.

 

Yes, we are tracking some of the Asian indices and I do get the feeling that this is more of a global downtrend, which is taking place. This will get executed in the next couple of months. So most other markets are looking weak for a 10-12% decline and I guess India might just be the worst performer.