Technical analyst Gautam Shah, senior VP at JM Financial says the market looks critically placed at this point in time. He has turned cautious on the market from his earlier bullish stance. He says the market is witnessing selling pressures at higher levels.
He sees the first important support below 6250, after which he says 6170 becomes a key level for the Nifty. He thinks the index could break below 6170 in January. “A close below 6170 would set Nifty up for a 5 percent decline at least,” he told CNBC-TV18 in an interview. A bullish stance can’t be taken until the Nifty crosses 6350, he says. However, he adds there are no immediate signs of weakness yet, though the price action in the Nifty has been lackluster.
"The Nifty is setting up for 300 point move either way in the next 3-4 weeks," he says.
He continues to advise investors to adopt a stock-specific approach.
Below is an edited transcript of the interview
Q: You have been a bit cautious on the markets for a while now. What makes you cautious? Do you think the market will struggle to get well above these record levels?
A: When we started of in the month of December we were extremely bullish. In fact, that has been our stance almost the entire year. But with what has happened in the last couple of weeks, we have turned a little cautious because we did not like the way the price action has behaved in comparison to the news flow that our markets received in the last two and half weeks.
December gave the markets the kind of news flow that could have taken it to significantly higher levels. Just to point out you had the election results, you had the policy, the Lokpal Bill, the taper news flow, the fact that the global markets were extremely steady with the US markets making a higher high almost on a daily basis, the rupee had stabilized in the range of 61-64/USD. Oil at some point of time in December had come off quite a bit.
Despite all of these factors our market just refused to move beyond levels of 6300-6350 which is an indication that clearly there is selling pressure at higher levels. If the markets wanted to breakout it should have done that in the second week of December but the fact that it has once again been unsuccessful is an indication that this market requires much more consolidation before it really takes out the wall of resistance in the form of 6350-6400.
We would like to believe that once these feel good days around the New Year gets over. There is a chance of this market actually losing some ground and January could be a month wherein you could see some more consolidation or correction. There are no immediate signs of weakness. So the level that we are looking at on the downside is about 6170. That is the precise level and once the Nifty breaks that level on a closing basis which could happen in the month of January. That would be an indication for a correction of about 5-10 percent.
On the other hand, if the Nifty were to take out this 6350-6400 resistance on a closing basis that would be some indication that may be the consolidation is completed and the market is headed higher. But our preferred view right now is that the market sees more consolidation; may be another round of correction. And given the kind of news flow that it has received and the technical setup, because when we look at the technical indicators many technical studies have actually refused to make a higher high while the indices have done that in the last couple of weeks. Therefore, we would like to believe that this is a point where one needs to be slightly cautious and not get carried away with the kind of sentiment that December brought.
When the Nifty took out that 6350 number, there was this euphoria for a few days which just about every brokerage in the country coming up with targets that were upped may be extrapolating the political factors that come into play in 2014. But looking at the news flow and the set-up, we believe that there is every reason to be a little cautious at these levels. Let the market cross 6400 on a closing basis, till that doesn’t happen I think there are risks to downside for our markets.
Q: Exactly how should a trader behave? If you have a position that things could really move either ways, should you bet a lot of money only after it crosses 6400? How should a trader take position for January?
A: I think the risk reward clearly at these levels is not in favor of going long at least from a short-term angel. We remain of the view that over the medium term, over the next 6-12 months the market has substantial upside but should you be entering at levels of 6300-6350 in the current setup? The answer is no.
I think one should really ignore the Nifty because if you look at the Nifty behavior in the last couple of weeks, it has been extremely range bound, it has been dull, boring. There is almost a lull that we have seen in the markets. What remains to be seen is whether this is a lull before a typical storm or whether the bulls are consolidating before they actually get back in form and this is something that will be very clear probably in the first week of January itself.
So our view to our clients has been to just ignore the Nifty for now. Since we believe that there are more chances of the market actually correcting, we would wait for the market to break down below 6170. If somebody is sitting on good profits in some of these popular sectors that have done well in the last few months, I think this is a good time to actually take profits, may be not go short because we don't have the confirmation but definitely take profits.
While the market has been in a range, there has been a lot of stock specific moves. If you look at the midcap index in comparison to the Nifty, the midcap index for the last 10 days has made a higher high everyday and this is at a time wherein the Nifty has just been stuck in a 200 point band. So this clearly tells you that there is some sort of a blowout which is taking place even in the midcap space and we feel that there is a lot more returns to be captured in that particular segment because this is only now that the midcaps have started participating. But some of the other sectors that we are focused on would be pharma, autos and metals. Apart from these three all other sectors are looking a little toppish at this point of time. So the view is to be sector specific, stock specific till the Nifty does not breakout of this tight 250 points range.
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Q: A word on what may lead this market lower. You were talking about the 6170 level. What are the index heavyweights that could lead it there?
A: One thing, which is very clear to note is: the market has lost leadership. Till a couple of months back, whenever the market used to make a higher high, it was mainly because of FMCG and IT. Sometime back, we said that the best for FMCG could be over and therefore now we are entering a phase wherein the FMCG sector could be a market performer or even an underperformer. This is something that we have seen the whole of December with the FMCG stocks just refusing to move higher.
What is really important to note is the way the IT index could behave going forward. There is no debate that the IT sector has been the best performer in 2013 and it almost feels as if this fairytale story is just not going to end. 7500 was the level where the breakout had taken place for the CNX IT index and that breakout gave us a target of 9600-9800 and this target zone has been achieved in the last two-three trading sessions. The IT index is looking very exhausted on the charts; the technical indictors have just refused to make a higher high.
A stock like Infosys has tested lifetime highs but with all the developments people are just shrugging off the news flow. Once a stock like Infosys comes of a little bit, I think there could be significant profit taking. So IT is clearly losing leadership at this point of time and there is risk of about 8-10 percent downside for the first half of 2014 in this sector.
Metal on the other hand is on top of our list and this is a sector that will continue to do well. It has done extremely well in the last three months but the best part is it has consolidated at regular intervals. 9500 was a resistance which has been cleared in the last couple of weeks and now it seems that the BSE metal index is headed towards a level of 10,500, may be even 11000 in the next three-six months. So metals and autos are the two sectors that we really like and whatever the Nifty might do even if it were to come off a little bit, I think these are the two sectors wherein one should buy on any and every decline. There is every reason to hold on to long positions because you might just get a little concerned about the Nifty. But I don't think these stocks will come off as much as the other sectors in the market.
Q: What is your strategy for the day?
A: We don't talk about specific stocks but there are pockets in the market like the oil and gas or the ADAG segment which is known to be high beta, that is looking a little on the weaker side. If you look at the oil and gas index just everybody talks about Reliance Industries but let us not forget every time a stock like Reliance comes to that Rs 900-920 area. There has been a lot of supply so the breakout has really not happened. And if the Nifty has to come off from current levels some of these stocks might just participate on the negative side. So oil and gas space and the ADAG space as a pack are looking a little weak for the next few weeks.
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