Nifty may drift towards 5025, says Barclays

The Indian market has been subdued over the last couple of sessions. In an interview to CNBC-TV18, Dhiren Sarin of Barclays says, the Nifty is very rangebound. "The sweet spot for the Nifty is around 5,350 on the topside. A break through that would see further solid gains. For the time being, given the European issues, the Nifty can start to drift back towards 5,025. The range essentially remains 5,000 to 5,350," he adds.

He is bearish on euro. According to him, 1.20 is a big floor for euro/dollar for the time being.

S&P, he says, has support at 1,320-1,325. “The market is quite steady, despite this pullback within range. If we do get through 1,320 then you could see another 4-5% downside quite easily,” he asserts.

Also read: Chances of Nifty testing 4800 not ruled out, says Religare Cap

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Sonia Shenoy.

Q: Is risk-off going to start on? Is the phase of risk-on coming to an end, technically?

A: Yes, indeed. We saw a very sharp reaction to Draghi’s comments yesterday. If you look at Italian and Spanish yields, they have reversed quite sharply from important resistance; Spanish above 6.20%, Italy above 5.75%. These are the important levels that yields need to go below to suggest that optimism is returning. But instead the markets actually have pushed yields quite sharply higher. That is suggestive of fear coming back into the markets. So, I am not quite certain that risk can actually be on again. It is more a case of selective positioning in some assets. But, for the most part, the euro does remain a bearish story.

Q: You track the technicals of these yields. Do they look like they are headed back to the old highs from which they corrected sharply 10 days back, after the initial comments which had come in from Mario Draghi?

A: It does seem like they can go back to their highs. Yesterday was the strongest move we have seen all year in these Italian and Spanish yields. So, it was very violent move. Infact for the last four months, every time we have had a pull back in the Spanish and Italian yields, these pullbacks have become increasingly more violent. So, we are getting more volatility as we go higher. It does suggest that the markets can potentially go back to the peaks and even over throw them in Spanish and Italian yields.

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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.

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Q: But in the near-term your general view across global markets is that it gets worse before it gets better, right?

A: That is exactly right.

Q: What about crude? It has worked its way back upto USD 106 per barrel on Brent. Did that pullback from USD 89 to USD 106 per barrel surprise you?

A: It did because we were bearish. However, Brent crude has not thrown a very meaningful bullish signal just yet. The real resistance area is the topside levels where we broke down from when we did start to turn bearish were closer to USD 115-112 per barrel. So, we are still below, we are still in the game. It seems like this bounce is an aggressive, but corrective bounce. We are going to allow for little bit upside towards USD 109 per barrel. But then we would look for a top in Brent crude as well.

Q: What about the rupee-dollar? Today, it has worked its way back below 56 again to the dollar? Do you see 57 or 57 plus, the old lows, being taken out?

A: Dollar-INR has been locked in a range. Now, let’s take a step back, this range is unfolding above the peaks of 2011, which comes in at 54.30. Technically, the market is acclimatising to these higher levels. That is ultimately still a bullish set-up. But for the time being I think the market still range trades in the near-term.

We must not forget the big 1.20 level in the euro breaking down through would clearly suggest a bullish outlook for dollar-INR even more so and we can see a push to new highs. For the time being, again this is a range trade. We are watching levels on the downside at 54.50, which is a trend line coming up right from the year to date lows and on the top side around 57-57.50.