We're Selling Autos...Again

JC Parets
January 3, 2019

Autos were some of the worst performers in 2018, and new lows on a relative basis to start 2019 suggest the first quarter may bring more of the same for this sector. This post will outline why we want to continue to sell strength in this sector, as well as the best ways to express this theme.

Below is a chart of the Nifty Auto Index hitting new 52-week lows relative to the Nifty 500. This trend of under-performance has been intact since early 2017 and appears to be heading back toward the lows it set in 2012-2013.

Click on chart to enlarge view.

While some individual stocks offered great mean reversion trades after a steep decline last September and October, the Nifty Auto Index only experienced a meager bounce. Prices have stalled again and momentum remains in a bearish range, suggesting this consolidation is setting up to resolve to the downside.

The cleanest way to express this bearish viewpoint at the index level is to define our risk at 8,650 by only being short below that level, and covering down near the 2016 lows of 6,850.

With that said, individual names like Eicher Motors may offer opportunities on the short side with better reward/risk and more potential upside.

This stock has already resolved its consolidation lower by gapping through support, suggesting we can be short if prices are below 21,575 and covering down near 17,075.

TVS Motor Co. failed to reclaim support at 567 and is now breaking below its short-term trendline. With momentum in a bearish range and prices back below support, we expect this decline to accelerate so we want to be short below 567 and covering down near 433.

We want to be short Apollo Tyres if prices are below 249, with an initial target of 195.

Madras Rubber Factory Ltd. looks poised to break down from this consolidation, so we can be short as long as prices are below last month's highs of 69,900. Our price target is down near 56,515.

Maruti Suzuki is breakdown down once again, so we want to be short if prices are below 7,415, with a downside target near 5,800.

We want to be short Motherson Sumi Systems Ltd. if prices break below 147 and be covering down near 96.50.

Tata Motors confirmed a failed breakdown and bullish momentum divergence by closing back above 165.25, but has stalled. If prices break back below that level, we want to be short with a downside target of 138.

The Auto Sector continues to be one of the weakest areas of India's stock market. With a shrinking number of short setups elsewhere, we want to continue to sell strength in the names discussed above.

If they begin to stabilize like our shorts in other sectors, we'll have to reevaluate, but for now we have our risk management levels and can exit with minimal losses should the market move against us.

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

Allstarcharts Team

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