Charts Of The Week: Bad Breadth For Stocks In India

JC Parets
April 24, 2017

The US Stock Market has been like watching grass grow. It's a hot mess and I'm all for it. We turned Neutral towards US Stocks in March so watching both the bulls and the bears get whipped around is great theater from our cash heavy seats. Nothing I've seen in the past couple of weeks has changed my opinion on this environment. To the contrary, everything continues to suggest having huge cash positions and not trying to be too aggressive - long or short. Cash is king sometimes and neutral is a position too, don't forget that.

Many of us have the ability to invest in other markets. For the few of you who cannot, I still think it's a good learning experience and a valuable academic exercise to explore other markets. You might not be trading (or allowed to trade) foreign markets today, but I promise you that one day in the near future, buying stocks in India will be as seamless as buying Microsoft or Apple. For most of us, it already is. The world is getting smaller, not bigger.

So with that in mind, I wanted to focus our attention today on markets in India. The bad breadth coming out of there stinks and I have a few charts to show you why.

First, here is the good old NIFTY50 trying to breakout above overhead supply going back to early 2015. New highs is not a negative characteristic. To the contrary, new highs is something we really only see in uptrend:

NIFTY50

NIFTY50

But it's what is happening underneath the surface that has me concerned. Notice how with the new highs this month in the NIFTY50, momentum (as measured by a 14-day RSI) put in a lower high. This bearish divergence in momentum is warning number 1 that this "breakout" is suspect.

With respect to momentum, it's not just the momentum of the index itself that we want to observe. We want to see how many stocks within the index are participating with bullish momentum characteristics (reaching above 70 in RSI). Notice how with each new high in the NIFTY50, fewer and fewer stocks within that index are participating with bullish momentum. That divergence is another problem:

NIFTY50RSIABOVE70

Next, here is the list of NIFTY50 stocks hitting new 52-week highs. With each new high in the index, bulls want to see an expansion of breadth, not a contraction. We want more stocks participating to the upside, not fewer stocks like we see today:

NIFTY50 HITTING NEW 52WK HIGHS

And finally, how about the Advancers vs Decliners? We call this the A/D line, which is a cumulative daily reading of the Advancers minus the Decliners. A good measure of market breadth is to see if the A/D line is keeping up with the index itself. Similar to the momentum gauges mentioned above, with the new highs in the NIFTY50 this month, the NIFTY50 A/D Line put in a lower high. This divergence is another negative for the stock market bulls in India:

NIFTY50AD

We take a weight of the evidence approach here at ALLSTARCHARTS. It's not just one chart or one indicator. We want to weigh all of the data collectively. Today we are focused on India's Stock Market as we are getting ready to launch Allstarcharts India (india.allstarcharts.com) coming soon.

If you're bullish India, you want to see an expansion of breadth as we make new highs. As if right now, aggressively buying stocks in India as a group makes little sense. But if we start to see an expansion of upside participation, in both price and momentum, then we can get aggressive on the long side like early 2016 and last Fall.

If you're interested in this type of analysis and are not already a member, make sure you sign up to lock in this low price before the new launch. All members of Allstarcharts will have this access to Allstarcharts/India. Start your risk FREE trial today!

Cheers,

JC

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