If we are looking at simple trend definitions, the Nifty is still in the uptrend, said Laurence Balanco, global technical analyst, global brokerage firm CLSA.
Speaking to CNBC-TV18, he said the Nifty pharma index is a sector that has underperformed for over three years.
Watch: India holding up pretty well amid emerging markets sell-off, says CLSA
Balanco said the worst rupee weakness is behind us and I would look for the rupee to starting to stabilise between $66.5 and $68.
Edited Excerpts: The last time we spoke with you, you had indicated that the overall trend for the Nifty is still on the upside, things have gone a bit awry over the last week or so, do you get a sense that perhaps this uptrend or this theory of an uptrend will now be put to rest?
It's still intact, your colleague mentioned 20-DMA (Day Moving Average), we are still above that, we are still above 50-DMA, we are still above 200-DMA. So if you are looking at simple trend definitions, Nifty is still in the uptrend. And to me, 50-DMA around the 10,659 area for Nifty is key and as long as that remains intact, your immediate bias is to the upside. It is probably worth bearing in mind, if you look at the Indian market in dollar terms relative to the broader emerging markets index, you have actually broken the downtrend of underperformance since the 2016 highs. So while the rest of emerging markets sell-off in relative terms, India is holding in there quite well.
I was looking at 10,650 and also the last closing on the Nifty was 10,590. You reckon if this range is broken for whatever reason, in that case, would the texture of the market completely reverse?
It doesn’t completely reverse. The big breakdown area, where you can get bearish on the Nifty is essentially the lows that you made in April-December 2017 and April 2018 which are just below the 10,000 level. As long as that is intact, you can call the Nifty in a broader trading range and it really had to break below that 10,000 area to turn the outlook for the Nifty.
You earlier also had given a target of about 31,000 on the Bank Nifty, are you retaining that as well?
Yes. If you look at the Nifty Bank, the uptrend is still there. We are still above the 50-DMA, yes, we have seen some hesitation at 27,000, which is just below the January highs, but even with this recent volatility, we haven’t violated any of the short-term support areas or the longer-term support areas.
What about the other markets because there is an increasing view now that a lot of money will be moving out of many emerging markets and into China, how is the Chinese market looking to you relative to other emerging markets?
Essentially, we can break China down into sort of three indices that capture different parts of the Chinese economy. So if you have got the MSCI China, which is essentially a heavily weighted towards the China internet names, which are US lifted, then you have their Hong Kong listed Hang Seng China Enterprises Index (HSCEI) and Hang Seng Index (HSI) and those markets did breakdown yesterday with the Shanghai Composite. So, it does look like the domestic China market is in for further weakness, but if you take the MSCI China index, which includes the China ADRs, that is still holding within a range and still holds above its 200 moving average. So you have got at least a relative outperformance from the MSCI China, but on the domestic side, it does look like we are set for further weakness.
If you are talking about the Nifty uptrend being intact then within sectors, how are you looking at things? It has been a phenomenal for instance month for pharma, does it look like some of these pharma stocks in India are making a durable bottom?
Yes, let us just take the Nifty pharma index. Absolutely, it has been a sector that has underperformed for over three years. If you look at the index, it has retest its lows two months ago, you have formed this double-bottom pattern so you have got a clear basing pace now.
What about this comparison between developed markets and emerging markets? Your thoughts on whether we are in for a sustained outperformance of developed markets?
I think, the key thing we have seen off late is obviously dollar strength and that has been a negative on the emerging markets side. So, we haven’t seen a resumption of the downtrend of the 2010 highs, but we have seen a move back into the trading range that we saw between 2016 and 2017. That does suggest that we are likely to see a retest of the lows of that trading range and it's anyway we break below those lows would the DM trend of outperformance continue. Again, we think that from the longer-term trend, it is unlikely but in the short-term, emerging markets underperformance looks like it continues.
What about the rupee; you have written notes on the way the weakness in the rupee has shaped up. Where do you see that going and in that context, how do you sort of trade on the technology, the pharmaceutical stocks?
The key thing that we had highlighted on the rupee was the trading range that it formed between 2017-2018 when we broke above $65.5, that give us an upside target of $68, which we have essentially met. If you look at our momentum indicators, momentum on the upside is now slowing. So, our base case in the rupee here is that we have probably seen the worst, $68-69 will be the top end of the range and we would look at support coming through at $66.50. So, I think the worst rupee weakness is behind us and I would look for the rupee to starting to stabilise between $66.5 and $68.
On the sector side, the pharmaceutical sector would be the preferred play on the setup there. Over the technology side, which had a great run up at the start of this year.
A word on commodities, if you have tracked them off late, crude has been very volatile, we have seen bit of a down play off late in metals.
It's a mixed bag depending which commodity you look at. We start off with oil being sort of a big impact on the Indian market is that what we have been flagging on the oil. Brent setup was that momentum to the upside was slowing. We now have a short term top in place that has formed below the $80 resistance area and the setup is for oil to correct back to the 200 day moving average which sits around $66 and our base case is for a trading range then to form between $66 and $80 going ahead, but immediate downside back to the 200 day at $66.
You did mention at the start of the chat that the Nifty uptrend will remain intact as long as the 50 day moving average of 10,650 holds. What is the corresponding level for the Bank Nifty?
Very similar. If we look at the 50 day for the MSCI banks, we are sitting at 25,930.
You expect the Bank Nifty to hold around these levels; it is sitting above 26,000 at the moment, how does the chart look for the rest of the year?
We still have that 31,000 ultimate upside target and we would be looking at that 50 day holding the short term pullbacks and the trend remaining to the upside.
I do not know if you have had the chance to look at any of the individual the Nifty components off late. Some of the stocks that have helped us through this rout is something like a Reliance Industries. I do not know if you have a view on that, if you could share some insights and within the banks has been some sluggishness around HDFC Bank, which is otherwise such a huge stock for the Indian market. Since you are positive overall on the uptrend, which are perhaps the constituents of the Nifty that look the strongest to you?
I do not have those charts in front of me, so I cannot comment on individual stocks. We have only got sector views that I can comment on currently.
As we have said before, the key to our upside target for the Nifty remains the bank index and obviously, we have talked about the pharmaceutical side, where we see the base forming out. We have touched technology before but I think a lot of the technology run is now behind us and would prefer the pharmaceuticals side.
Any other sectoral trend that emerges which might keep India on track with the higher side targets that you have on the Nifty?