One of the things that really caught my attention during our Monthly Chart Review for June was that the Nifty Auto Sector is approaching resistance on an absolute basis, as are some of the sector’s largest components.
In this post, I want to dig into the sector and identify if there’s still opportunity in the sector on the long side.
First, let’s take a look at the Nifty Auto Index weekly chart on an absolute basis. Prices briefly broke below support at 5,200 in March and quickly reversed, sparking a rally towards resistance near 7,000 where we sit today.
This is a multi-year level of resistance, so we’re likely to see some consolidation after a 57% rally off the March lows. For now, 7,000 is the line in the sand. If prices are above that, then Auto’s can see further upside towards 9,300, but below 7,000 then there’s too much downside risk and opportunity cost in being aggressively long the sector.
Click on chart to enlarge view.
Given the three largest components of the Nifty Auto Index comprise 51% of its weighting, we want to be paying close attention to their action.
Right now, two of the three of them are stuck below major levels of resistance as well. Bajaj Auto is above 2,500 already, but Maruti Suzuki is stuck below 6,600 and Mahindra & Mahindra is stuck below 580. It’s going to be very difficult for the index to make further upward progress if its two largest components cannot break above these levels.
On a relative basis, the Nifty Auto Index vs Nifty 100 Index ratio is breaking out of a 2-year downtrend line, but still faces a major hurdle of resistance near 0.73. So while the sector can continue to outperform the broader market in the short/intermediate-term, if bulls want to see sustained outperformance then this ratio needs to be above the 0.73 level.
One final chart that gives the bullish case some pause is the relative performance of an Equally-Weighted version of the Nifty Auto Index vs the traditional Cap-Weighted Nifty Auto Index, which made new all-time lows in March and has yet to recover.
This downtrend suggests that breadth within the sector is weak, meaning that the average component of the Nifty Auto Index is faring much worse than its largest components…and has since late 2013. Bulls in the Auto sector want to see upside participation expanding, not deteriorating if there’s any hope for a new multi-year uptrend in absolute and relative performance to develop.
To conclude, there remains opportunity in the sector on the long side, particularly given our bullish view on equities as an asset class. The Nifty Auto Index is approaching resistance near 7,000 on an absolute basis, suggesting a pause in the short-term is likely. The catalyst for further gains would be a breakout above resistance in the sector’s two largest components, Maruti Suzuki and Mahindra & Mahindra,
Despite the overall bullish action of the sector and Equities as an asset class, the relative performance of the Equally-Weighted Nifty Auto Index suggests that not all stocks in the sector are participating in the rally.
As a result, we want to be very selective and own stocks with strong relative performance and positive momentum characteristics across multiple timeframes. By doing that, we can simultaneously position ourselves to limit our downside should the sector fail here and continue its downtrend AND benefit from further upside in the event that the 7,000 level in Nifty Auto is broken to the upside.
In looking for these stocks we also don’t want to constrain ourselves to the 16 holdings of the Nifty Auto Index, which primarily hold Large-Caps. The entire Nifty 500 has 32 stocks in the Automobile Industry, so it’s important to consider all of them when identifying how best to take advantage of this theme in the market.
And given our Mid/Small-Cap Resurgence thesis, we’re looking specifically for opportunities in those Mid/Small-Cap names which are not represented in the Nifty Auto Index.
To access the Auto stocks we want to be buying, you must be a premium member of All Star Charts India. Please login below or start your risk-free 30 day trial today.
Lost Password?