'Stay away from midcaps for the next 2-3 weeks'

Technical analyst at JM Morgan Stanley, Gautam Shah expects the Sensex to slip to four-digits with a medium term target of 9000.

He believes that capital goods and auto sectors will be worst hit during the correction phase. But he expects banking stocks to outperform and pharma stocks to be stable in the current scenario.

He also advises to stay away from midcaps for the next 2-3 weeks. Nifty could rebound by another 50-80 points from the current levels but at those levels one can comfortably short this market.

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

Take us through how you read the corrections that came in last week and how soon do you think the Sensex will reach 10,200?

Last week was not good. This market has been giving bearish indications for the last 3-4 weeks but the price action was not following the same and it happened only last week.

The delay in the market correction has led to a sharp fall in the week itself. We have broken down and now we are making lower tops, lower bottoms on daily charts. Once the critical levels of 11,340 were broken, we were clearly in a downtrend.

Overall, the set up is negative and triggers from various studies are suggesting that this market is going to correct further. One should not look for a bottom in a hurry and 10,200 should be achieved in the next 2-3 weeks.

Is it a comparable level on the Nifty as well?

On the Nifty we have a target of 3,050, which is 170 Nifty points away.

Is it going to be volatile till we get there or it is going to be one way?

I don't think it is going to go one way because we have already corrected about 1500 points last week. There is a possibility of a pull back coming maybe tomorrow and during that pull back close to 11,340 or 11,450, it would be a good opportunity to sell. And that is when the next leg of downtrend would begin and take us down to 10,200.

You would not be convinced about the pull back above 11,300; would use it as an opportunity to sell?

Absolutely, because on Friday, the markets opened up with a gap on the upside which was 250 points on the Sensex, 100 points on the Nifty and that was an excellent selling opportunity because its triggers were negative.

We easily get carried away by this 50-100 Nifty points pullback, which are retraced very quickly. So any pull back this week would be a selling opportunity at lower levels.

What is looking weak in sectors?

Most of the sectors are looking weak on the charts and just about every sector is going to be hit. But capital goods and autos, which have run up quite substantially in the last few months are likely to be the worst hit.

Watch out for these two sectors on the sell side as we have covered a lot of stocks. Apart from these two, banking might just outperform in this market because it has already reacted last week. This is one sector, which has a positive technical set up from a medium term and long term perspective.

Did cement and metals react badly last week?

Cement ran up quite sharply and we have seen a reaction but there are no signs of bottom levels as yet. Even from current levels, cement sector could react by as much as 5-7 per cent.

Metals, which were relatively steady last Friday are likely to react this week itself and some of the metal stocks can lose 10-12 per cent from current levels.

Lot of the analysts feel this run up has been fast because the market had reached lofty levels with a solid base of 10,000. Do you agree with that or do you think it will slip below that as well?

There is a fair chance of this market going into four figures. Post 11,000, technical triggers had just not been with the price action and that is when we saw a divergence developing and therefore we started off with a profit booking call on the markets. We are still maintaining our medium target for the Sensex at 9000, which we initiated 3-4 weeks back. Once we are at our short-term target, we need to review the situation.

As a Nifty trader, have you seen enough to feel that you can now begin short selling the Nifty?

Absolutely, because one will see a lot of pullbacks like last Friday. These pullbacks will give an indication that the market is reversing but I think it should be used as an opportunity to sell. Nifty could rebound by another 50-80 points from current levels but at those levels, one can comfortably short this market.

Tactically, would you go more overweight on the midcap space or is there pressure both on frontline Index stock and midcap Index?

Index stocks have reacted quite a bit and even midcaps will start to react. Basically it was the momentum and euphoria, which was taking midcap stocks up and now that we are in a downtrend, some of the midcap stocks even though have a positive set up for the medium and long term are going to react in the short-term. So even from a midcap space perspective, I would like to stay away for atleast 2-4 weeks, if not more.

For leadership and stability, which is the sector that is going to come out and stand up?

It could be banking and possibly pharmaceuticals because pharma stocks have not run up too much in the recent past, so they might just be stable in case the market weakens. Watch out for banking and pharmaceuticals from an outperformance perspective.

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