It is time for investors to book profits as the market is showing signs of making a near term top, says Gautam Shah, Associate Director & Technical Analyst, JM Financial.
In an interview to CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, he sees 8430 as a key support level for the Nifty, breaking which the index could slip to 8200 and even 7900.
“It is time to take serious profits; the next couple of months will be about protecting returns,” says Shah, who expects the market to correct over the next 4 to 8 weeks.
Shah says F&O data shows there are not much hedged positions in this settlement cycle, unlike in the previous couple of settlements. This is a sign of bulls getting confident, or even over confident, cautions Shah.
According to him, the blowout rally on Friday has converted many bears into bulls.
“This usually happens closer to a market top,” Shah says.
Shah feels the Bank Nifty is becoming overbought as it approaches 19,000, and is advising clients to book profits. He says bank socks have been running up on expectations of a dovish guidance by the RBI at its credit policy meeting on Tuesday. He sees a big correction in the bank Nifty if the market does not get to hear what it has been expecting.
Below is the verbatim transcript of the interview:
Q: You were bullish on the markets and 8600 is here but the question now is should one alight from the train because it has given you so much gains and it has picked up too much speed too soon, good to take money off or are there still more gains by staying on?
A: Yes, the move has been pretty spectacular and not only in the last few weeks but since the start of this year. It is quite phenomenal that you have a market that has moved up from a level of 6000 to about 8600 odd levels today without a correction of more than 5 percent. So, it has been an excellent move and thankfully we have been able to tag along for our clients and no point of time did we get an indication of the markets topping out.
The news flow has been very supportive; it has actually got better and better. The momentum has been great, the support from the global markets has been excellent and commodities have only helped the equities move further up particularly in the last couple of months. At some point of time, the markets had to get to a level where you sit back and take a call whether you want to participate any more or not. I think at this point of time, at levels of 8600-8700 just about too many technical studies have come to a point to suggest that this could potentially be a top. This zone of 8600-8700 is a wall of resistance and I don’t think it is going to be very easy for the market to clear this.
If you look at the technical charts, none of the technical indicators are making a higher high. The price action has done very well in the last couple of weeks almost making a higher high gradually on a daily basis but the technical indicators are exhibiting a completely different story and this typically happens at the top of any bull market. However, it is all about the momentum right now, we saw it in the last quarter of 20007 and early 2008 and when the momentum is strong you do not fight the momentum. So, what we have been recommending is to take profits. In this, 8600-8700 zone is a great area to be taking serious profit because the next couple of months is going to be all about protecting returns.
Apart from the technical studies, if you look at the F&O data, in the month of November and also in the second half of October, the market was extremely hedged. So, it was very difficult to expect the markets to start a major correction. However, as we have started off the month of December, if you look at the F&O data, the market is pretty light. It is not as hedged as it was sometime back and that is a sort of an indication that the bulls are extremely confident or I should say overconfident at this point of time.
Even from a sentiment perspective after what happened last Friday the blow off move, the spectacular 80-100 point move, that has converted even a lot of bears into the bulls. This obviously happens at the top and there are enough jokes doing the round of how bad the bears are fairing at this point of time. So, when you have all these factors come together, I am strongly of the opinion that the markets are unlikely to see substantial upside from here. This bull market which has many more legs to go on the upside is going to pause and retrace and if it does that it is going to be a great setup for the Budget because the next four to eight weeks might be a little on the corrective side.
Having said that you should not be fighting a trend in a bull market, so, what we are recommending here is booking profits. However, at any point of time if the Nifty were to break 8430 which is important level for the next couple of weeks, that would be the first indication of entering shorts because then you could have the Nifty go down to a level of 8200, potentially even 7975 and lower.
Q: What about the Bank Nifty, as we speak there is significant outperformance from the Bank Nifty, currently at 18650, what would be the levels to watch there?
A: When I was on your channel the last time we had given a target of about 19000 for December 2015 for the Bank Nifty and we are at December 2014 and the Bank Nifty has got close to that particular level. I am strongly of the opinion that the Bank Nifty charts are also not supportive with what the price action is doing right now and therefore in this 18500-19000 band I think is a good area to be booking profits.
The momentum has been strong and this has been the piped piper of the market but when we look at the weekly and the monthly charts Bank Nifty has done most of its targets based on indicators or pattern studies. Therefore, this is an excess and typically excesses last percentage points and that is a reason I believe that closer to that 19000 mark on the Bank Nifty would be a good opportunity to profit.
Tomorrow is going to be a big day, just about everyone is talking about it and if tomorrow the market does not get what it wants then the Bank Nifty might just be under severe selling pressure. So, I would be extremely careful there.
Q: A word on some other global indicators, what is the crude chart telling you and what is the S&P 500 chart telling you?
A: If you look at the US markets, they have not done anything substantial. I have to admit that I am a little surprised that the US markets have gone to make a higher high and we are trading at lifetime highs at this point of time. However, once again the chart setup is just not supportive. At such a level you don’t have the kind of momentum that should exist in the US markets and you have the Dow sticking to 17700-17800 band where there is a lot of resistance.
Even the S&P 500, running into that 2070-2100 band I think there is going to be a lot of selling pressure and at any point of time in the next 5-10 trading sessions you could see a knee-jerk reaction in the US markets. It is difficult to pin-point what could be the trigger but at least the charts are giving an indication that there is some problem somewhere and you are going to see an effect of that on the price action very soon.
Crude is a very big factor because these days in the morning you see what crude has done and accordingly you take a call on the Indian markets. I think crude is also getting close to its target. USD 60.65/bbl on the Nymex crude is a multiyear support and that breakdown that took place at around levels of 90, had a target of around USD 67/bbl-USD 68/bbl. That has been done in the last two-three trading sessions and therefore around 60.65 we see Nymex crude settling down. I know there will be people in the market who talk of substantial downside even from current levels but it is looking very overdone.
When I look at crude you also need to look at what the rupee has been doing because equity markets have done so well and you have the rupee depreciating beyond 62 levels on Friday, I think that is an indication that maybe you will see a round of depreciation and you could actually see the rupee depreciate to levels of 63.5 and that is the indicator of where the markets could head in the next four to eight weeks.
Given all of this, it all boils down to the dollar index that had a breakout around 82-82.5. The target for dollar index is around 90, we are already at 88.5 and once the dollar index moves to 90 there is a chance of a top out. If the dollar index does top out, it is going to have a significant impact on commodities and equities because then commodities will start to rise and possibly equities will start to fall.
Q: Since you are slightly cautious on the market, if we do see a dip then which are the stocks that you would go ahead and buy?
A: There are three sectors, which we are advising our clients at this point of time irrespective of our view on the Nifty because even if there is a correction these three sectors will do well.
Firstly, pharmaceuticals, obviously it is a defensive name and it has done well in the good and the bad times so this is one space which still has a lot of steam on the upside. In case of 5-10 percent correction on the index it will see a lot of outperformance.
Secondly, I would like to go with capital goods. I know it is a high beta name, it generally moves with the market but given the kind of breakout that we saw couple of months back, capital goods as a space is going to outperform for the next six to eight months. So, in case of a market decline this is one of the best bets to accumulate for the next six to eight months.
Finally, it would be auto because auto has shown that it does well in the good and the bad times. Still a great chart even at a level of 19000 on the BSE auto index. I think every small decline of 2-5 percent should be used to buy there.
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