Barclays to bet on India only if Nifty sustains above 5080

Investing in Indian market has been a nightmare as stocks were on downtrend last weeks. Major foreign institutional investors (FIIs) are seen fleeing the domestic on macro woes, while most experts are negative on India.

Dhiren Sarin, Technical Analyst, Barclays says that the brokerage will turn positive on India but only if the Nifty sustains above 5080. He feels that that the market needs a bit of a pause and that should give enough fuel for the Nifty to have a little bit of a relief rally and a bounce.

"In the least if things are getting better in India we would like to see the Nifty above 5,080. So near term we are looking little bit positive but we will be more patient to wait for confirmation if the market can get back above 5,080," he said in an interview to CNBC-TV18.

According to Sarin, the rupee may still lose some strength as there are more downsides. He also warns that the Indian currency may test even 56 per dollar. 

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

Q: It's been a one-way ride for the global markets on the way down, the S&P has collapsed from 1,420 to sub-1,300 on Friday. Do you think markets are oversold and due for a bounce?

A: The S&P 500 has had a pretty much straight line rise throughout the beginning of the year. I think this pullback that we have seen is nothing uncommon, after you had such a strong aggressive rally. We view it as a healthy unwind overall, a healthy bearish move which should setup the next leg higher.

For the time being, there are a few concerning chart patterns out there, especially in the Dow and the S&P, which does seem like the market can push lower into the summer before we can get a stronger base.

Q: Are you characterizing this just as a rally from the start of the year or do you think there has been a u-turn and revisiting the highs of the year are unlikely in the next few months?

A: I think it's more the former case where we can get back to the highs. I wouldn't get too pessimistic just yet because it’s the US markets that are pulling back in some manner. What is more concerning is the European markets, the IBEX in Spain, the CAC 40 in France.

Those seem to be posting more sustainable bearish signals and the trade that most people would be trying to get on to, we would feel, is very profitable for traders playing relative value, buying US equities versus European equities. We do think there will be some leaders coming out of this move.

Q: What about the dollar index. That had a good ride, moved up to about 81 plus now. Do you see more strength in the near-term or is it overbought?

A: Yes, good ride. There has been a bit of understatement. Even what we have seen in the US dollar index is 14 straight sessions in a row of higher closes. That's an event we have not seen in our charts, in its entire history. We have seen a very sustainable move.

But, on Friday, we saw aggressive profit taking hold of the market. That happened right against the year to date peaks in the US dollar index. We do not think that is much of a coincidence. Technically, previous peaks tend to be important value areas. The market tends to try and sell against those levels.

We have seen a little bit of a dollar bearish move on Friday, a reversal day. We think that is a bit sustainable in the near-term. In the earlier part of this week we potentially see signs of a slightly weaker dollar, which the market, the optimist can hold on to for a little bit.

Q: Where does it set the rupee because that's been on a big downward spiral hitting new lows practically everyday?

A: Yes, the rupee is a clear standout, a laggard of the Asian currency complex. We have seen a straight line rise in the dollar rupee cross. I think that is not done yet.

If we look back on the charts from last July to year end in 2011, we saw a straight line rise pretty much from 44 to 54. Now what we have seen is a rise from about 48. If we just project the same sort of magnitude, it even gives projections up to 58.

I do not think it's overdone yet. In the near-term, we keep looking at around 53.50 area if the rupee stays above that zone. It's starting to get comfortable at higher levels, the market is getting acclimatized. We can still get a push higher towards 56.

Q: What is the Nifty's chart telling you now? It’s been a pretty bad May so far, all the way down to 4,800. Do you see more damage or the possibility of a pullback in the near-term?

A: The last time we were here the Nifty was trading above its 200 day average and we were eyeing that quite carefully. The market broke straight below that and we saw a lot of aggressive follow-through to the downside. Nothing out of the ordinary. We would expect such selling when the 200 day average breaks.

Now, the markets are little bit overdone. As we mentioned, the dollar showing some signs of weakness in the major currencies seem like the markets are overdone across the board, even if you look at US yields. They had a straight line drop. Market just needs a bit of a pause and that should give enough fuel for the Nifty to have a little bit of a relief rally and a bounce.

I did mention the 200 day average that comes in around 5,080 in the Nifty. In the least, if things are getting better in India, we would like to see the Nifty above 5,080. In the near term, we are looking a little positive, but we will be more patient to wait for confirmation, if the market can get back above 5,080.

Q: Is there anything that you see on the charts of either Nifty or on the Hang Seng which suggest that we have hit a near term low which might hold for this summer or for now, we are only talking about relief rallies and you can't take a final call yet?

A: I would be very hesitant to assume that the worst has passed. Things like the Nifty, you've seen a small signal on Friday technically, on the charts, where we can get a bounce. But, really, its very early stages for a trend to turn. One has to watch markets and you have to steadily see resistance levels, stop side levels erode for the market to actually start gaining confidence.

I would look towards the INR to see if sentiment is changing. Since INR has been leading the downside against the dollar, if the markets are to improve for Asia in general, it would be the INR that will first start to show signs of strength. We have not seen that yet. I prefer to stick with the trend and look for lower lows coming into the summer.

Q: Do you see the old lows of December or October for any of the Asian markets being retested in the summer fall?

A: At this point I would have to think yes, that is on the cards. It may not happen right away. There are many events that can happen between now and the lows of December. There are many chart events as well. But, overall, I think the market does chop and drift lower.

They even think the Nifty underperform markets like the Shanghai composite and that also is concerning, not to mention of course the underperforming US market. Ultimately, the market does chop lower, test those lows. The real important levels in the Nifty do not come in towards about 4,400-4,500. There is still a lot of room for downside before we get to critical levels.

Q: The one thing that we have taken a bit of comfort from though is the fall in the price of crude. But, if you track Brent crude from this level of USD 107-108 per bbl, does it look like its done for the moment or can it drag down all the way to USD 100 per bbl or below?

A: You hit upon an interesting point and you said it's a sense of comfort with crude falling. I respectfully would differ with that to some extent. To us, it's not very comforting. The fact that crude has fallen is a pairing back of growth expectations in the world. At this point it is a concern.

Yes, granted if crude oil stays at these lower levels and stabilizes for some time that is comforting. But the manner in which it has fallen so aggressively, to us it suggests fear in the market. For crude oil, Brent crude as long as it stays below USD 110-113 per bbl, the setup is still modestly negative. We do see a push lower in oil as well just as we are seeing risk aversion in global assets.

Q: By the same token, what would you say of gold?

A: Gold is an interesting one because we had a pretty sharp decline on that as well. Taking out some medium-term levels, which means that the longer trend has been damaged to some extent. What we have seen though is around USD 1,520-1,530 per 10 ounce area, the lows of the last 1.5 year, that is holding firm and the markets trying to buy against that.

In the near term we can see little bit upside especially, since the dollar is weakening towards about USD 1,600-1,620 per 10 ounce. But, we will take it from there. If gold gets up above USD 1,620 per 10 ounce then we would assume that we can get towards about USD 1,750 per 10 ounce next. Until then, we are modestly positive. We would try and look to sell again around USD 1,620 per 10 ounce.