Correction coming to an end; see breakout soon: JM Fin
Gautam Shah, Technical Analyst-Investment Advisory Service of JM Financial said the market was at the end of its corrective period and added that it was currently oversold and an upside breakout was likely. It would be difficult for the Nifty to break the 4100-4200 support zone, he said.
Shah said he was bullish on the banking space
Q: Do you think this 500 point correction has played out or are you in the camp which believes 4,000 Nifty will break?
A: The market is close to bottoming out because 4,100-4,200 in itself is a very important support zone based on a number of technical studies. We have seen a nice 10% correction that has taken place in the last 7-8 trading sessions and it was required. It is a part of a consolidation and it is possibly a retracement of this entire move that we saw in the month of May. So our view was that you could see a deep correction in the month of June which has already taken place. From around this, 4,100-4,200 level we could actually see the markets bouncing back and once the market takes out 4,365 which is our important resistance on the upside, we wouldn’t take too much time to get back to 4,650-4,700. So I think we are positive and most of the studies on charts are oversold suggesting that it is time for the markets to rebound strongly.
Q: What is convincing you that the rally is about to end? Is it tying in what you are seeing in the global indices as well?
A: The markets could be ending their corrective period that began a few weeks back. The global backdrop is something that tells us that India would continue to outperform going forward. If you look at the US market charts or some of the Asian market charts, you have good reversal patterns on those charts indicating upside to the tune of 15-20% over the next three-six months. If that is the view of some of the other markets, I think India would lead and could outperform by doing about 25-30% over the next six-eight months. I think we would be positive at this point. If you look at most of the technical studies on the daily or on the weekly charts or simply go by Dow theory which is clearly in buy mode at this point, there is no reason to be significantly negative. The market was overbought, it required a little bit of cool off that has taken place a couple of weeks back and from this level, the risk reward is in favour of trading on the long side and investing and I think 14,000-13,500 is a sort of a trading base for the market from where we could actually get back to 15,500-15,600 once again.
Q: The voice of caution over there though is the fact that some emerging markets (EM) like Brazil have broken their 50 day moving average. At what point would you start getting worried about the Nifty and its levels?
A: When you talk about Brazil and moving averages, I think different people use different moving averages. So while the 50 day has been broken, there maybe a 13 day moving average that has not been broken. I wouldn’t give too much importance to particular moving average for taking a call on a particular market but I think the other emerging markets which we follow have broken out of a good reversal pattern which I just mentioned and for the Nifty itself I think 4,100-4,150 as a zone is very important because you have a number of technical studies hinting at a possible bottom to this correction around that area.
In case 4,100-4.150 were to get broken on a closing basis then you could go lower another 50-100 points which I think is unlikely because of the current charts for the market and that is the reason I believe that the risk reward is okay and one should be entering the market at this point of time.
Q: What is happening with some of the heavyweight constituents though on the Nifty particularly from the commodity space?
A: Talking about heavyweights, what is interesting is that some of the stock specific charts have covered that gap that we saw in the month of May and while the indices are still safely above that gap which we call a runaway gap, which is very bullish from a short-term and medium-term perspective. Some index heavyweights have actually covered that gap which is a positive sign and it tells you that the cool off in some of these stocks that have run up for 60-80% in the last two to two and a half months is already done and therefore even these index heavyweights are now ready to rally along with the midcaps, which anyway look good on charts. So I think the expected rally from current levels is likely to be broad based.
Largecaps to a certain extent have underperformed the decent past but I think now they should start to do extremely well and our best pick in the market would be the banking space.
Q: Public sector undertaking (PSU) or private banks?
A: Banking looks extremely solid on the charts. While the market has corrected in the last two weeks, if you look at the banking index, it has been sideways which tells you that there is accumulation taking place in the banking space and while the PSU bank stocks are looking stronger on the charts having the potential to move up, 50-60% over the next few months, the private sector banks would be a market performer going forward. But as a sector I think this is one space which will surprise a lot of people and the charts are indicating that you could get some positive news flow over the next few weeks that could take the sector substantially higher.
