5200 on Nifty, 17000 on Sensex key support levels: Barclays

World equities have witnessed a pullback in the last couple of days. Is this a just relief rally or a sustainable one? Dhiren Sarin, Technical Analyst, Barclays is in the neutral camp but hopes that things can turn better.

In and interview with CNBC-TV18, Sarin said, "From a trading perspective, we have some key levels imagined at 5,200 in Nifty, 17,000 in Sensex. While the market stays below those levels, I would view any gains with suspicion. One would try and fate the gains, sell into any rallies but psychology shifts when these tipping points give way. So if 5,200 on Nifty and 17,000 on Sensex gives way, I would change the tactic and start to buy on dips rather than selling on rallies."

Furthermore, Sarin believes that the key downside support levels are around 4,600 in the Nifty. If there is breakdown below 4,600, that would suggest a massive stop is taking shape, something like the credit crisis even. "For the time being we are holding on to our horses. We do think that this range stays in place, hopefully looking for a base against 4,600 in the coming months," he said.

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: What have you made of the pullback in global and local markets over the last few days? Is it a relief rally in your books, which will fizzle out or something more durable?

A: For the Nifty and Sensex, I think the pullback right now has to be looked at with some caution. Markets are rangebound, we are seeing 4,800 to 5,200 range pan out in the Nifty. What is paramount are the concerns in Europe and that is what is driving these moves. Whatever happens in the Spanish markets, Spanish yields is probably going to be key as to where the Nifty goes next.

For the time being, we are a little bit more in the neutral camp. But we do know where the pivots are where things can turn better. 5,200 on the Nifty is a key level on the topside; those with the lows from March and April. If the market can get back above that level then we would start to become more optimistic but for the time being a little bit more neutral expecting further ranging between those levels.

Q: Some of your peers have suggested though that globally what happened last week was probably the precursor of a big move technically from markets. It could also see a snap in the EMDM relationship, in that it could be emerging markets that outperform in the second half, technically any signs of that for you?

A: It is a little bit to the contrary. We are seeing a lot of damage in EM markets. In fact, if you look at the US equity market, last week, the S&P 500 pursued its best week of the year. This is not what we saw in the Nifty, this is not what we saw in the Jakarta composite. In fact, the Jakarta composite is a good example of EM space because earlier this year, we saw the Jakarta composite post all time highs not many equity indices have done that.

But in May, we saw the Jakarta composite post a new low for the year. It just shows how much the psychology has shifted away from EM and into US equities instead. Over the coming quarter, one must remain cautious about investment into emerging markets. We are seeing a little bit of a fracture here in that phenomenon.

Q: How do you approach the next couple of weeks then in terms of a trading stance, both till the market if it manages to get to 5,200 and then if it breaks beyond that?

A: Yes, I think from a trading perspective, we have some key levels imagined at 5,200 in Nifty, 17,000 in Sensex. While the market stays below those levels, I would view any gains with suspicion one would try and fate the gains, sell into any rallies but psychology shifts when these tipping points give way. So if 5,200 gives way, 17,000 gives way, I would change the tactic and start to buy on dips rather than selling on rallies.

Q: What have the global currency complex suggested to you amidst all the Spanish newsflow? Is it telling you that markets are more likely to break out or you sense a lot of caution in the technicals of the currency complex?

A: We have seen very choppy moves. If you look at the US-dollar index, we have had a pretty sharp pullback into the end of last week and then a rally and then again a pullback. For the time being, I think over the next week or so, we get this ranging condition persisting. But beyond that, our view is still dollar bullish, we do think that the US dollar is setting up for strength in not only the coming weeks but even in the coming months. We would be trading tactically in that manner.

Q: Would you extend that to say that the rupee may not have tested its final lows yet?

A: Yes, I don’t think the rupee has tested its final lows. But that said, we did mention that there is going to be a little bit of a ranging scenario. Now dollar-INR, the peaks coming at around 56.50 that seems to be a key level.

On the downside, it is around 54.30 which was the pick we saw last December, I think the market is likely to settle into a range between 54.30 and roughly 56.50. But ultimately as this eurozone issue sets in and we see a lower euro dollar, there is a good risk that dollar-INR can go up and test 57-57.15.

Q: What kind of immediate targets would you set on crude - is it looking like a durable break in the rally?

A: The last time I was here, brent crude was trading around USD 100 per barrel but dollar-INR was still around current levels. Unfortunately, I don't think that the coming off in prices for crude oil is having much of a bullish effect on the INR just yet.

It may have a bullish effect on the INR but not just yet. I think that time being growth concerns are paramount. We are starting to see WTI crude push towards its year-to-date lows at around USD 75 per barrel. Brent crude has already completed a massive double top, posting new lows not seen since last February.

There is a lot of weakness in store in energy markets, we are bearish on oil but at the same time, I don't think that is a direct benefit for the INR just yet.

Q: In the eventuality that there is some kind of negative outcome in terms of global news, what kind of downside risk do you see for the Nifty, where would you set that at?

A: The key downside support levels are around 4,800 in the Nifty and actually a bit lower as well around 4,600. I think those latter levels around 4,600 are especially key because a breakdown through that would suggest that the massive stop is taking shape, something like the credit crisis even.

For the time being we are holding on to our horses. We do think that this range stays in place, hopefully looking for a base against 4,600 in the coming months.

Q: What do you see on the US charts, the S&P has also been quite choppy, it went down to about 1,280 then came back to 1,325, do you see it piercing the recent lows that it made?

A: The interesting component of the US equity market has been its volume. We have seen a strong move in price but volume has been quite tepid. We have not seen the investor participation in the rally that we saw last week. That to us, is a negative characteristic; it tells us that the bounce has been corrective.

In terms of the S&P500, topside of 1,320- 1,340 that should offer good selling resistance and the market should likely look to fade these gains for a dip back towards 1,220-1,240 area. That is a core scenario.

If we start to see strong gains above 1,320-1340, we would start to reassess the situation and assume a much more positive outlook.

Q: When you look at the key Indian charts, stock charts either in the largecap banks or largecap infrastructure names, any sense of leadership that you are getting there?

A: To be honest, not too much, I think markets have been quite flat in terms of even relative outperformance or performance versus the Nifty again. I think the reason why it is flat is because it is another explanation why the market focuses on what is happening on the euro zone situation rather than what is happening in the domestic cross-sector relative scenario.

Q: Apart from the US markets and the general aversion to emerging markets, there has been a bout of underperformance from Asia generally, which of the markets stand out as most vulnerable to you? Is it that technically Asia has hit a rougher spot than the others?

A: There is one good news for India on that front; India and the INR led the move to the downside in May. I think that is slightly shifting hands because now it is just not the INR, it is the Malaysian ringgit, the Indonesian Rupiah are all showing some signs of weakness even the Taiwanese dollar.

So for choice, I think looking outside of India, the Malaysian ringgit is showing some signs of weakness, we can probably get a push up towards last year’s pick at 3.24 in dollar-ringgit and we had maintained our focus even starting to go abroad outside India as some contagion starts to seep in.

Q: How is gold shaping up technically?

A: Gold has been a victim of the dollar. We have seen gold chop around in this range between USD 1,520 per ounce and USD 1,620 per ounce, and not showing much direction in the near-term.

I think this range persists over the coming week or two but the downside triggers for us are clear around USD 1,522 per ounce. If the European situation gets more dire, we start to see euro-dollar break down once again, gold has a good chance of testing that USD 1,522 per ounce; a break below which we would suggest a more stronger bearish backdrop.

The main takeaways is more ranging in the near-term, watching those pivots around 1,520-1,620 waiting to see which direction the market can take it through.