[India Chart of the Week] Bullish Breadth Signaling Opportunity In Nifty Autos?

JC Parets
May 30, 2018

Equal-weight indexes are one of the most valuable tools we use here at Allstarcharts. They provide a perspective on the overall strength or weakness of an index's components that's not otherwise seen in the cap-weighted version. The confirmation or divergence signals generated by comparing the two often acts as a leading indicator, letting us know whether the cap-weighted index's move is supported or if we should be on the lookout for a potential reversal.

Below we've created an equal-weight Nifty Auto index in blue, which is constructed by assigning the same weighting to each of its 15 components. We've plotted it against the cap-weighted Nifty Auto index in green.

Click on chart to enlarge view.

What stands out about this chart is the divergence we've seen over the last few months. The cap-weighted index made a lower high while the equal-weighted index made a new all-time high, suggesting that there is underlying strength in the index components that's being overshadowed by weakness in the larger-cap names such as Tata Motors.

For us, this relative strength is an opportunity. By doing a deep dive into the sector we've identified buying opportunities in some of the the smaller cap names showing absolute and relative strength. Without the use of equal-weighted indexes and other breadth studies it would be tough to identify divergences and profit opportunities like this one.

Premium members can view our deep dive into the sector by clicking here.

If you’re not already a premium member of Allstarcharts India, you can sign up here for a risk-free trial to gain access to the list of our favorite Auto stocks and other premium research.

Lastly, if breadth studies like this one are new to you and you're interested in learning more about them, be on the lookout for some training content we're working on and should be sharing with you all in the weeks ahead.

Allstarcharts Team

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