Sensex may find support at 9,000

Gautam Shah, technical analyst at JM Morgan Stanley says that the Sensex could find support at 9,000 levels and it is likely to see a reversal from 9,000 levels.

He adds that the Sensex can be seen in a 9,000-11,000 range in the next couple of months and it may see a pullback of 1,000-1,500 points after hitting 9000.

He says that the medium-term target for Nifty is 2,730 and the current correction is a part of the long-term bull market.

He is positive on midcaps, cement, paper and textiles stocks. He adds that tech stocks will underperform and may lose up to 15%, midcap cement may gain 75-80% from current levels, while metals will be the first sector to bottom out.

He further says that none of the Asian indices are close to bottoming out.

Excerpts from CNBC-TV18's exclusive interview with Gautam Shah:

Where do you think the market will finally stabilise?

We initiated our bearish medium-term target of 9,000 on the Index in the last week of March. So we are just maintaining that level, just 300 points away from 9,000. It is about 2,750 on the Nifty and we are confidant that this level of 9000 should hold the market. So this is a time for lot of market participants to gradually enter the market on the long side.

Are you talking about a level from which we will get a technical bounce from 9,000 or do you think it could be a medium-term bottom we may form around those levels, technically?

This week we had updated our short-term target to 9,700 on the Sensex and we expected a bounce back from that level but it did not happen. But 9,000, is a level from where we will see a reversal and not a pullback, psychologically also 9,000 is a very important level. This is a level where the market has a lot of difficulty and I think we should see a reversal and not just a plain pullback around 9,000.

Your short-term target on the Nifty is gone. What is the medium-term target now for the Nifty?

The corresponding Nifty level is 2,730 for a Sensex target of 9,000, which about 50-60 points away now.

How much of a pull back do you expect once we do hit that 9000 mark?

We should see a quality pullback maybe 1,000-1,500 points and I do believe that this market will trade in a range of 9,000-11,000 for the next couple of months. There will be a few sectors that will underperform, but there are a number of sectors looking interesting and are likely to outperform during this reversal.

Are you a bit surprised with this period, which has come?

Not at all, in fact there are certain patterns on the charts, which have clear characteristics of such a fall. And this had to come because we were in an extended uptrend and an extended uptrend is always followed by an extended downtrend. So one need not be surprised that we have seen some of the Index heavyweights and some of the sectors move quite substantially in the last three-four months. So the fall is also substantial.

We have been talking to lot of your peers about whether the overall framework of the bull market still remains or have some levels been violated, which led you to think that we have entered a bear market. What are your medium and long-term charts telling you about that?

I do not like to use the word bear market because I still think on the monthly and on quarterly charts. This market continues to have a very positive technical set up. I would say this is a medium-term downtrend in a long-term bull market and the fact that we have reacted in just one-one and a half month quite substantially suggests that this is a long-term bull market correction. So that is the reason we feel that 9,000 should hold, 2730 on the Nifty. There are a number of stocks at these levels, which are looking very interesting. I think in lot of midcap and small cap stocks, one will actually see a 'V' shape recovery once we bottom out.

Is there anything in the midcap space which tells you that we near a bottom, because their the fall is assuming monster's proportions; stocks are falling 20% in a day on hardly any volumes?

Absolutely, midcap cement, paper and textile are the three sectors, which we are concentrating on. I think it is an excellent time for investors who missed the rally in the first space; maybe a few months back to actually enter some of these stocks. Some of the midcap cement stocks look the best from a short, medium and long-term perspective. Over the medium-term, they could gain as much as 75-80% from current levels. So I think it is good time to pick up midcap cement stocks.

As we make our way back from 9,000, do you expect a shift in terms of sectorial leadership?

Absolutely, in fact there are a few sectors, which look very weak on the charts. Technology, which has really outperformed the market in the last three to four weeks, is looking extremely negative. I see the technology sector lose as much as 15% from current level. So one has to closely watch this sector. In case one is having investment positions, it is a good idea to hedge. So technology is going to underperform. The metal sector, which has cracked quite a bit in the last couple of months, looks like the first sector to bottom out. So I will watch for metals close to 9,000.

Do you track any of the global indices on the charts? Are any of the global markets indices showing you any such bottoming formations?

Not yet. In fact some of the global indices have a very similar set up to that of the Sensex. There is this bearish continuation pattern breakdown, which took place last week in our markets and at the same time, we had a number of other Asian indices breaking down. So it is all happening together and I guess none of the Asian indices are even close to bottoming out.