[Premium] The Long and Short of It

First we want to look at a table off all the nifty sector indexes that will be replicated below for each the individual components of each sector. These performance stats are from several key inflection points in the broader market: the January 2018 highs, the September 2018 highs, the October 2018 lows, and the US Stock market lows on December 24th.

The second to last column outlines whether the daily RSI value has been more recently overbought (True) or oversold (False), which tells us whether momentum is in a bullish or bearish regime.

What we're looking for in these stats is for trend direction by looking at performance over several different timeframes. If prices are in an uptrend, they will be exceeding prior highs. If they're in a downtrend, they will be exceeding prior lows. When they're not trending, they'll have similar performance stats over several timeframes.

Where are prices relative to key levels from the past? Let's have a look.

The Nifty Financial Services Index is above its January highs of 11,400. Prices are above a rising 200-day moving average, though momentum hasn't gotten overbought yet. Overall, this is constructive action that suggests higher prices toward 12,410 are likely.

Click on chart to enlarge view.

Within the sector we can see a majority of its components are above their 200-day moving average, while momentum regimes remain mixed. We want to be erring on the long side of this sector.

The Nifty Bank Index looks similar, breaking out above 27,500 and targeting 33,080.

The stats here look similar, with most stocks above their 200-day moving average. We want to be erring on the long side of this sector.

The level in the Nifty Private Bank Index is 15,520, with an upside objective of 16,840. We want to be erring on the long side of this sector.

Not surprisingly, the stats look similar, though there it's important to note that the median stock is still down relative to its January highs. It's important to keep in mind that we live in a cap-weighted world, so this view helps provide context on what ALL of the index's components are doing, but doesn't necessarily predict what the index itself is going to do.

The Nifty PSU Bank Index remains a "hot mess", unable to break below 2,650 to the downside or 3,450 to the upside. Momentum remains in a bearish range and price near a flat 200-day, signaling little directional edge.

Only one component has momentum in a bullish range, so still a lot of work to be done here. We want to be neutral this area of the market until this range resolves itself.

Consumer Goods continue to consolidate within a symmetrical triangle, which signals indecision among buyers and sellers. Until this resolves there's not much of a directional edge here, but given the structural trend is still higher we're inclined to believe that this will break out instead of down.

And the stats reiterate what we see in that chart, as about half of the stocks are overbought and half oversold. Given our view on equities, neutral/bullish is best here.

Energy is finally seeing some upside momentum as Reliance breaks out and the rest of the sector mean reverts and finds its footing. As long as prices are above 14,700, the bias remains toward 16,245 and then 17,490.

Again, the sector performance is mixed but Reliance is doing well which pulls most of the weight here. The fact that the other components aren't weighing on the index as much is a big positive, so we want to be erring on the long side of this sector.

The Nifty IT Index remains above 15,150, but momentum continues to wane and individual components remain weak. Given that context, a neutral approach is best until it makes new highs.

This shows within its components stats, which are mixed at best.

The Nifty Auto Index has experienced some mean reversion, but remains below a downward-sloping 200-day moving average with momentum in a bearish range. We had some mean reversion trades in this sector during February, but for now most of our upside targets have been met.

Given our stance toward equities as an asset class, we don't want to be short. We'd rather wait and see how this mean reversion plays out, so neutral is best for now.

The stats show just how much weakness still remains, with the momentum of most stocks in a bearish range and below their 200-day moving average.

The Nifty Infrastructure Index saw some mean reversion as well, with momentum getting overbought for the first time since early 2018. This suggests we don't want to be fading the recent strength, but we also don't want to be buying this aggressively either.

The components within this sector have begun to improve, but still need need to do a lot of work to build a base and move higher. For now, neutral is best.

The Commodities Index is in a similar position, with momentum getting overbought and prices right near their 200-day and a mess of resistance.

The components remain mixed, so a neutral approach is best until we see how the index handles this area.

The Nifty Metals Index is a bit weaker, with prices below 3,055 support, a downward-sloping 200-day moving average, and bearish momentum.

The stats show most components below their 200-day with momentum in a bearish range. Given our stance toward equities as an asset class, we don't want to be shorting stocks, but if you have to be short something this is one of the few areas it makes sense to try.

Pharma has stabilized above support and is resolving higher. If prices are above this downtrend line, the bias is higher toward 10,300.

Components are mixed, so we don't want to be aggressively long this sector index, but some of the individual components look good.

The Nifty Media Index remains below a downward-sloping 200-day, resistance at 2,615, and momentum in a bearish range. If prices are below that level, then the bias is sideways or lower.

Most of the components are very weak, so a neutral or bearish approach here is best.

Last is the Realty Index, which is working through resistance near 244 through time, rather than price. Momentum has not gotten overbought yet, but given how constructive this action has been we don't want to be short.

As we can see, the components are mixed but improving. A neutral approach seems best, as the action seems constructive but not a reason to be long until we at least clear 244 and get overbought.

The Bottom Line: The price improvements seen over the last month are extremely constructive, so much so that there are only two sectors that look like potential shorts (Media, Metals, and potentially Autos). The largest sectors, Financial Services and Energy, are resuming their trend to the upside while the weaker sectors regain their footing and mean revert higher. This is not an environment where we want to be shorting stocks, however, that doesn't mean we can go out any be aggressively long either.

After a 15% rally in the Nifty Free Float Smallcap 100 and a similar move in Midcaps, it's tempting to want to chase this strength to avoid missing anymore upside if that was "the bottom." We are not going to do that though. Instead, we are recognizing that current conditions continue to suggest erring on the long side of stocks and sticking with the strongest names while those that mean reverted attempt to base at higher levels.

Cash is still a position, but we can slowly start adding to longs as they come into our risk management levels or break out to fresh highs. If that was the bottom, there will be pauses and pullbacks along the way, which we will certainly take advantage of.

For now, the market still has to prove itself. The broad-based nature of this rally is very encouraging, so observe patiently to to see if it continues and builds on itself, or falls apart like it in January.

While we think the breadth and momentum divergences make this time different and more sustainable, we suspect that a lot of the stocks that mean reverted higher and are approaching resistance will still need to do some backing and filling before heading higher.

In another post I've outlined some of the best reward/risk setups in individual stocks, that more importantly have well-defined risk in the event that our long thesis is incorrect.

As always, thanks for reading and let us know if you have any questions.

Allstarcharts Team