'Nifty, Bank Nifty likely to breakdown soon; bigger rally seen in pharma, gold, silver'

The market rallied 40 percent from its March lows, backed largely by liquidity and hope of re-opening of economies globally after stringent lockdowns. But, Gautam Shah has a different view.

"The action of last one week looks like the Nifty50 is in a transition phase and the technical setup got weaker now," said the founder and chief strategist at Goldilocks Premium Research in an interview to CNBC-TV18.

He feels 10,500-10,700 looks like a wall of resistance.

"Now we have an indication on the chart that the market probably is setting up for breakdown. If the index closed below 10,280 levels, then it could see 9,950 and then eventually 9,600 in coming weeks. The risk reward to go long is not justified now," he said.

He further said also the leadership was not going to come to too many sectors.

"In fact it is the time to be conservative and cautious as there are conditions that the breakdown may be seen in coming sessions."

He feels the Midcap and Smallcap indices are safe but the problem is in mainline indices and largecaps.

Shah believes the bigger rally in pharma, chemical, insurance, Midcap IT, gold and silver is yet to happen, whereas the rest is looking toppish now.

Bank Nifty rallied 28 percent from its March lows, continuing to underperform not only to Nifty50 but also other major indices and global markets.

"Bank Nifty is a high beta, but it has been a laggard. Nifty itself recovered 61 percent of its February-March decline, 60-80 percent recovery by global markets, but Bank Nifty showed only 38 percent of recovery of its entire fall seen in February-March period this year. So I do not see any sign of bottoming out," Shah said.

He further said he would be negative on the banks.

"If the 21,200 levels get violated then 20,500-19,500 can be seen and eventually it can break 18,000 as well. It provides best shorting opportunities. Medium and long term charts also do not indicate that one can be a buyer in the index at these levels. Hence, be careful in Nifty as well as Bank Nifty," he explained.

The Nifty Auto index gained 45 percent from its March lows.

"It suggests that the index discounted too much, this rally is not likely to sustain. These are not levels to enter, better lighten up positions as over the next couple of weeks, there could be reversal not only in auto, but also capital goods and oil & gas sectors," Gautam Shah said.

In case of Pharma index which rallied over 60 percent from its March lows, he feels charts are good and the trend is rock solid.

"We have 10,700 targets for Nifty Pharma index, and eventually it may hit 12,000 mark. We continue to be positive on the sector. If Nifty50 and Bank Nifty break down, the focus would shift to pharma only," Shah said.