[Premium] Fading The Mid and Small-Cap Bounce

First let's take a look at the indexes themselves to see what we're dealing with and why we may still want to be looking at them and/or their components with a neutral/short bias.

Several weeks ago the Nifty Free Float Midcap 100 finally confirmed the bullish momentum divergence that formed throughout May, June, and July, bouncing roughly 9% from the lows and closing back above our risk management level of 19,020 for the first time in nearly 3 months. With that said, momentum remains in a bearish range and the 200-day moving average is now as flat as a board, suggesting a neutral approach is likely best when it comes to trading the index itself.

Click on chart to enlarge view.

The Nifty Free Float Smallcap 100 experienced a similar bounce, but remains below our risk management level of 8,040 and a downward sloping 200-day moving average while momentum is in a bearish range. While we don't want to be short the index itself unless we're below 7,270, there's little evidence that its intermediate-term downtrend is over. If we're between 8,040 and 7,270 a neutral approach remains best.

While the reward/risk setups in the indexes aren't great, what we see is that despite recent strength, neither of these indexes are in uptrends. They continue to lag on a relative basis as well, so if we're looking for short opportunities we should continue to do so within the weakest sectors of these market cap segments, like mid and small-cap Public Sector Banks.

With that backdrop in mind, let's get into the individual stock setups where the reward/risk is skewed in favor of the bears.

Federal Bank Ltd. is a great example of a name we want to be fading strength in if prices are below 94.75 and taking profits at 74.50.

If prices are below 805 in Gujarat Gas Limited we want to be sellers and taking profits down near 685.

IDFC Limited is back above our risk management level, but if it breaks back below 47.50 we want to be short and taking profits near 37.50.

IDFC Bank Limited is retesting its breakdown area. If prices are below 44.50 we want to be selling strength and looking for an intermediate-term downside price target of 20.25.

Mangalore Refinery & Petrochemicals Ltd. is failing a retest of former support. If prices are below 85.50 we want to be short and looking to take profits at the September 2015 closing lows of 50.

Reliance Power is also retesting former support. If prices are below 35.35 we want to be short and taking profits at 19.50.

Tata Communications is retesting former support as well. If prices are below 610 we want to be short and taking profits at 500.50.

Tata Power Company is a name we've highlighted several times on the short side, but it hit our tactical target of 68 a few weeks ago and started to bounce. If prices break back below 68 we want to be re-establishing short positions and covering near 55.50.

Union Bank of India is failing at trendline resistance. If you want to trade it against this downtrend line you can, but a more conservative level to trade against is 99 because it's that level that really defines the stock's long-term downtrend. Either way, our downside price target is 42.25.

After a tepid bounce attempt, we want to be selling a breakdown below 320 in Can Fin Homes Ltd. and taking profits at 251.

Capital First Ltd. is back above our risk management level for now, but if prices break below 532 we want to be shorting the stock with a downside price target of 345.

We want to be fading strength in CG Power & Industrial Solutions Ltd. as long as prices are below 68, with a price target of 41.50.

Godfrey Phillips is also back above our risk management level, but if prices break below 815 we want to be short with a downside target near 460.

IFCI Ltd. is retesting broken support after breaking down from a nearly 3-year range. As long as prices are below 17.50 we want to be short and taking profits down near 7.75.

India Cements is retesting former support, but for this one we'll wait for a breakdown back below 105 to short it with a downside target near 64.

Jain Irrigation is retesting former support. If it fails and continues to close below 86.50 we want to be short with a downside objective of 47.

Oriental Bank of Commerce is above our risk management level, but we want to be shorting a breakdown below 75.50 with a downside target of 49.

Srei Infrastructure Finance Ltd. is another name attempting to bounce. If we get more strength toward 71 we want to be selling it as our downside objective is much lower near 30.

There are a number of other stocks that look like they're headed lower, but are not included on this list because of their proximity to our risk management levels and price targets. If/when a better reward/risk situation develops in them we'll point them out in a follow-up post, but for now it's still good for informational purposes to know that there are quite a few ugly charts in this space not listed above. Some examples include Bank of India, Allahabad Bank, Andhra Bank, and Syndicate Bank.

The Bottom Line: We've been patiently waiting for a bounce in sectors like Public Sector Banks and Infrastructure, and we finally got them over the last few weeks. The stocks above are those where our risk is well-defined and the reward/risk is still very much skewed in our favor on the short side.

There's little evidence that the structural downtrends we're trading in the direction of are in the process of reversing, but if prices start to stabilize and consolidate sideways or move back above our levels then we'll have to reevaluate. For now we'll continue to take short setups in the stocks that are below a downward sloping 200-day moving average, whose momentum is in a bearish range, and whose prices are near our risk management levels so that we can minimize losses in the event that we're wrong.

Thanks for reading and let us know if you have any questions.

Allstarcharts Team