[Premium] Comprehensive India Update
September has been a volatile month with weakness hitting stocks across the board, so in this post I want to explain why now isn't the time to be pressing shorts and what we're looking for to mark a tradeable bottom in the Equity markets.
The Nifty 50 is approaching potential support near 9,850 as momentum gets oversold for the first time since early 2017. While Largecaps continue to outperform on a relative basis, on an absolute basis they're breaking down just like the rest of the market.
The Nifty 100 is at support near 10,460 with momentum getting oversold.
We continue to see an expansion of 52-week lows in the Nifty 100. Until we see a new low in price and fewer stocks making 52-week lows, we're unlikely to see a sustainable rally.
The same can be said for the percentage of stocks with momentum in a bearish range. We're seeing one of the highest readings in recent history at over 40%, however, until we see some sort of bullish divergence there's no reason to step in here to try and pick a bottom.
The Nifty Free Float Midcap 100 is approaching support near 16,030 as momentum gets oversold once again.
We're also seeing an expansion in 52-week lows in Midcaps, however, there's a slight bullish divergence over the last few weeks as fewer stocks accompany the new lows in the index's price.
The percentage of stocks with momentum in a bearish range are not showing that potential divergence yet, hitting new highs as prices decline. Ideally we'd like to see a bullish divergence in both breadth measures before attempting to trade on the long side.
The Nifty Free Float Smallcap 100 has been the weakest index by far, still falling below support at 6,100 toward the next level at 5,425. Momentum is oversold but there's no bullish divergence forming just yet, so there's little evidence of a coming reversal in price yet.
Like Midcaps, we saw a massive expansion in the percentage of stocks hitting 52-week lows (nearly 40%!) and are now seeing a slight bullish divergence as fewer stocks are making new lows with price.
Also like Midcaps, we're not yet seeing any divergence in the percentage of stocks with momentum in a bearish range.
The performance of Smallcaps relative to Largecaps continues to decline, with little evidence of support at current levels. Until this ratio finds its footing, it will remain a headwind for the broader market.
Looking at the broad-based Nifty 500, prices are approaching potential support near 8,490 as momentum gets oversold.
The Nifty Financial Services Index is at potential support at 10,130, however, what we're looking for is this potential bullish divergence in momentum to finish forming and confirm by closing back above the previous price low. This is the type of setup we'd be looking for across the other indexes, sectors, stocks, etc. so that we can define our risk on the long side and put the trade's reward/risk and probability in our favor.
The Nifty Fast Moving Consumer Goods Index is at potential support near 27,780 as momentum gets oversold. It's sliced through several potential support levels, so we want to exercise patience here before trying to step in and call a bottom.
The Nifty IT Index is the only sector still above support with momentum in a bullish range. If prices are above 15,150 we can be long, however, if prices break below that we want to get out of the way to avoid a potential drawdown similar to the other declines we saw elsewhere.
The Nifty Metals Index continues to consolidate near a flat 200-day moving average and support at 3,515-3,555.
The Nifty Commodities Index however broke to new lows on the downside as momentum gets back into oversold territory. If prices are below 3,400, there's potential downside toward 3,240.
The Nifty Infrastructure Index is the weakest of these three, but is approaching support near 2,795 as momentum gets into oversold territory.
The Nifty Auto Index also quickly crashed toward support near 9,100 after breaking 10,500. Momentum is getting oversold, but prices need to find some support at current levels or 8,650.
The Nifty Media Index broke through 2,490, which leaves it vulnerable to test 2,150. Momentum has tried to put in several bullish divergences, however, prices have yet to confirm any of them.
The Nifty PSU Bank Index looks vulnerable here, likely to make new lows. With that said, not sure I'd be initiating short positions here as I think we'll get a better entry in this and several individual components soon.
The Nifty Realty Index remains one of the weakest sectors, but is approaching potential support near 196. Momentum is oversold with no sign of a divergence forming.
Reliance Energy continues to drive the Nifty Energy Index, putting in a sharp reversal over the last two weeks.
The continued under-performance of the Equal-Weighted Nifty Energy Index vs its Cap-Weighted counter-part shows the weakness underlying the Energy sector and that when Reliance Industries falls, there's little under the surface to prop up the index.
Outside of the stock market, our long trades in the Currency space continue to work well. We want to be buying any and all weakness in USD/INR, EUR/INR, GBP/INR, and JPY/INR if they're above our risk management levels. These are strong trends that we want to be involved in.
Additionally, as I outlined here two weeks ago, Aluminum and other base metals are setting up on the long side once again.
Crude Oil is making new highs. This is a strong trend that we've wanted to be a part of for a while. If prices are above 5,335 we want to be long with an upside objective near 7,500.
Natural Gas prices continue to improve as well, with momentum getting back strongly into overbought territory. We can either be buying weakness toward 221.50 with an upside target of 254, or we can buy a breakout above 254 that targets 291.
Gold is also setting up on the long side for the first time in what seems like forever. If prices are above 31,600 we want to be long with an upside target of 35,075.
Finally here are some individual stock ideas on the long side to play for a bounce if/when we get one. Keep in mind that we're waiting for divergences in breadth and momentum to develop and be confirmed before being aggressive on the long side to take advantage of any counter-trend rallies.
Asian Paints Ltd. is retesting support as momentum diverges positively. If prices are above 1,214.50 we can be long with an upside target of 1,460.
If prices in Can Fin Homes Ltd. are above 227.25, that would confirm a small failed breakdown and bullish divergence and potentially target 320.
If Divi's Laboratories can get back above 1,380, we want to be long with an upside target of 1,905.
HCL Technologies is one of the few stocks that's held up well during this period. If prices are above 1,055, we can be long with a target of 1,275.
Housing Development Finance Co. can be traded on the long side if prices are above support at 1,645, with an upside target of 1,805.
We want to be buying weakness in JSW Steel if it's above 344.50, with an upside target of 464.
Page Industries is trying to hold support at 28,600. If prices are above that level, we can be long with an upside target of 40,260.
The PTC India Ltd. trade I outlined last week has yet to materialize, but is one worth keeping on our radar. If prices are above 67.90, we can be long with a target of 85.25.
Sun Pharma is a name we can be buying weakness in as it retests support at 590, with an upside target of 726.50.
Sun TV Network Ltd. may see a bounce as it stabilizes around support. If prices are above 578.50, there's potential upside toward 725.
Tata Consultancy is testing support at 2,055. If prices are above that level we can be long with an upside target of 2,690.
TV18 Broadcast Ltd. is attempting to find support at 33 as momentum diverges positively. If prices are above 33 we can be long with an upside target of 44.
All of the individual stock setups above are lower probability until we get some sort of confirmation of a bounce in the major indexes. A weak market will be a headwind, particularly for counter-trend trades, however our risk is well-defined in each of these areas in case we're wrong. With that said, if/when the broader market gets a bounce, I think these stocks will be set up well to take advantage of it on the long side.
The Bottom Line: There has been significant technical damage done to most charts in India over the last few months, with declines really accelerating in September. Most sectors and indexes are below risk management levels and momentum is in a bearish range. These are not signs of a strong market. This damage is not going to repair overnight, so we shouldn't expect a V-shaped rally back to all-time highs. Instead, we need to exercise patience and look for divergences in breadth and momentum as the major indexes and many stocks approach potential support levels. Once those divergences develop and are confirmed by price, we will have a tradeable bottom to take advantage of in the short-term.
We will get clues about the long-term implications of these declines in price from the bounce, or lack thereof, that we see in prices. In several areas we'll want to be selling strength, not buying weakness, so we'll use any strength in the coming weeks and months to reposition ourselves on the short side of the weakest areas of the market.
For now, these are the individual stocks that I think are developing the conditions needed for an elevated reward/risk trading opportunity within a counter-trend rally. There are also several opportunities on the long side in the Commodities and Currencies space that we've been discussing and think will continue to work. If you have questions about any other stocks or assets we cover, check out the updated Chartbooks or email us.
Thanks for reading and please let us know if you have any questions.
Allstarcharts Team