See deeper cuts if 5548 snapped; wary of HCL Tech: Jai Bala

Nifty which closed below its 200-Day Moving Average for the first time after August 2012 is likely to hold on to current levels, however if it breaches the November low of 5548 then there will be further deeper cuts, Jai Bala of cashthechaos.com told CNBC-TV18 today.

"Udayan Mukherjee made a very fine point yesterday - how the short term pullbacks are actually feeding the bears. I think that cycle is going to continue and we are going to see a extreme short term pullback," Bala said. Also read: Nifty rebound unlikely; may even test 5320: PhillipCapital
The carnage on Dalal Street has continued since last two sessions, following political uncertainty, ETF funds and FII selling and ever-worsening economic data. On Thursday, the Sensex closed at 18509, down 292 points or 1.55 percent and the Nifty ended at 5574, down 98 points or 1.73 percent.
Bala believes that CNX IT is likely to trade above 6643. He advised to remain cautious on HCL Technologies as it recently broke key support of Rs 766. He finds Infosys attractive in the long term, but sees it falling in short term. Below is the verbatim transcript of the interview Q: How did you read yesterday's move, the break below the 200 Day Moving Average (DMA) and whether there is more weakness for the Nifty or is it looking like it is poised for a pullback?
A: More than the 200 DMA, what is important at this point of time is the structure of the market. I will give you precise price points but more than that, you have to pay attention to the structure. If you look at the weekly charts of the Nifty, it has actually overlapped into the February 2012 highs. What it means for the long term is that market is trending higher, it doesn’t overlap into the preceding moves. Data points tell you that the entire move from 2011 low was actually a corrective ascent.
Secondly, the same is the case with the Bank Nifty but its a little more bearish than the Nifty. The trend line from 2009 lows, that has been breached and also it has overlapped the February 2012 highs. So that is also giving the message that the move from the 2011 low was actually a corrective ascent. Again, if you look at the Nifty midcap 50, it has gone below the 2012 lows and if you look at the BSE smallcap index, it is much more worse than the midcap, it is again within 4.5 percent of the 2011 lows. So this is telling you uniform message. Not that we want these data points to come and tell us that we need to be bearish on the market. We have been highlighting this negative breadth right from October to December and we went short exactly on the top of the market, on the day the market made top right at your channel. So, the message is, now it has come to the short term. 5548, the November low is very important for the market. I think it is going to hold for now and the market is going to pull back from that point of time. Udayan Mukherjee made a very fine point yesterday - how the short term pullbacks are actually feeding the bears. I think that cycle is going to continue and we are going to see a extreme short term pullback. But, if 5548 breaks, the cuts are going to get much deeper and it is going to be a very bearish decline beyond 5548. Q: All of us this morning are talking about the prospect of a pull back from this 5550. Is there a small possibility that the market will not oblige this trading consensus by pulling back?
A: That's quite possible. There are multiple ways to label the markets' movement at this point. But one of them tells us that if the market were to break 5548, there will be big range breaks and markets are trying to break into a larger range on the downside. If you look at the India VIX, if it was a commodity at this point in time, somebody should be buying because there is a perfect set up on the India VIX and it is very likely that we are going to see India VIX rise to about 21-22 in the short term. Unfortunately, you can only buy volatilities and you can't buy the India VIX per se. So, the message there is also saying that volatility is going to increase in future. Q: How would you trade these two names - HCL Tech and Infosys?
A: If you look at the CNX IT as such, I think it looks like it has got one more leg up to finish the topping process. The CNX-IT as such I think will stay above 6643. There might be an extreme short term decline but I think we can still try to play long on the IT index. HCL Tech has actually broken an important support at Rs 766. So, you have got to be bit cautious. I think Infosys might be a better play on the long side but there might be little more downside in the extreme short term. Q: On the point you were making about the volatility index- any parallels to draw with what's happened with other emerging markets as well, because the emerging market index has been slipping, the VIX on the emerging market ETF as well has been spiking about six-seven percent. Are generally all these markets headed for sharper cuts you think over the medium term?
A: The emerging markets pack is a very diverse space at this point in time. If you look at something like Thailand, Jakarta- they are all doing tremendously well but they are also in a topping process. So, if there was a compound VIX for the emerging markets, I think they would also be showing some amount of increase in volatility. I had also pointed this out - how the emerging markets are actually diverging with Dow Jones and the S&P - that is a very bad sign for the global picture. For the last three-four years, it has always been, the emerging market which seem to be better than the US market, when the emerging market diverge from the US markets, the US markets tend to move in the direction of emerging markets later on. So, even the S&P actually went below the 5558 level two days back - that is actually a significant break for the markets. I think the markets are going to see a correction of the November to March highs for the Dow Jones and S&P. Q: So in the event of a pullback that we are considering today, what could be the levels that you could see the Nifty going up to and at around what levels would you be looking at opportunities in the short side again?
A: We can play the pull back on both sides. So if there is a durable pullback, the market has to take out 5630. If it does take out 5630, we can even jump on the long side and we can expect the market to hit closer to 5790-5825 but we have got to be very patient. On the lower side, we have already spoken about 5548. So, 5548 and 5630 range is going to be important from the extreme short term.