[Premium] India Q3 2019 Playbook (Part 1)

As far as Global Equities go, there are still few uptrends out there. The median stock market is 5.5% below its 2018 highs and only 22% of those we track are above them. With that said, the numbers have slowly been improving and continue to move in the right direction.

In contrast, the median Nifty Sector is 14.50% below its 2018 highs and the only one above them is the Nifty Financial Services/Nifty Bank/Nifty Private Bank indexes. While that's a third of the Nifty 500's market-cap right there, the sector can't pull all of the weight on its own.

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Meanwhile, the Equal-Weight BRICKS index is back above resistance and breaking out of its 18-month consolidation. We were buyers of this pullback in Q4 and continue to think the path of least resistance is higher.

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The ratio below isolates the performance of India relative to the rest of the BRICKS. The trend has been higher, but has lost upside momentum and is now rangebound at best. With a flat 200-day and momentum switching back and forth between overbought and oversold conditions, the best case scenario would be for India to perform "in-line" with the other BRICKS. Its days of significant outperformance look over for now.

BRICKS relative to Developed Markets continues to base, but lacks a catalyst for to break out of this multi-year base.

Using US ETFs we can see India retesting its breakout area relative to Emerging Markets. If this retest is successful then outperformance should ensue, but given the lack of upside momentum as of late a rangebound mess looks more likely.

Moving into Indian Equities, the 10 largest Nifty 500 stocks continue to trend higher, but like many sectors and individual names are experiencing a bearish momentum divergence as they make new highs. This, at the least, suggests a correction through time or price is likely in the near-term.

Here's the Nifty 50 trying to hold above its former highs of 11,740 as momentum divergences. If we're below that level, a test of support near 11,155 and the continuation of this rangebound trade looks likely.

Here's the Nifty Mid-Cap 100 failing at resistance once again, suggesting the risk is toward the 2018 lows of 16,000.

The Nifty Small-Cap 100 continues to underperform but is largely range-bound between 6,500 and 5,670 on an absolute basis. This rangebound action is reinforced by the fact that momentum continues to switch rapidly between overbought and oversold conditions.

Here's the summation of all market-cap segments, the Nifty 500, sitting towards the top of its 8,980-9,925 range. The risk here remains to the downside in the near-term until this range resolves itself.

In addition to momentum divergences, even the strongest areas of the market are experiencing breadth divergences as well.

Here's the Nifty 100 pressing up against all-time highs while fewer and fewer stocks make new highs.

And fewer and fewer stocks are getting overbought.

These are not the characteristics that are supportive of a strong trend in stocks and the main reason we've remained cautious for quite some time.

Getting into the sectors, let's start with the Nifty Financial Services Index, which remains the clear leader. Even so, it recently failed to make new highs as momentum diverges.

On a relative basis, its trend relative to the Nifty 500 has gone parabolic, which is not sustainable. The trend is clearly higher, but the sector looks due for some sort of consolidation in the near-term.

The Nifty Bank Index (and Private Bank Index) did not make a new marginal high in June as we saw in the Financial Services Index. A divergence that also supports the call for a pullback in the near-term.

Consumer Goods continues to struggle with resistance near 31,000. While a decisive break below 29,000 is needed to confirm the beginning of a downtrend, it's looking more and more likely that this consolidation will ultimately resolve lower. Momentum is in a bearish range and fewer and fewer stocks in this sector are trending higher.

Energy is also resolving to the downside after consolidating near its 2018 highs for several months. Prices near a flat 200-day and momentum in a bearish range suggest a sideways trading range is the best case scenario for the sector.

Here's Nifty Energy also resolving its consolidation lower relative to the Nifty 500. The bias looks to have shifted to the downside.

IT continues to fail at its 2018 highs as fewer and fewer components participate to the upside. Rangebound trade between 15,150 and 16,200 looks likely, however, the resolution of that range will decide which direction the next major move will be in.

Nifty Auto remains in a strong downtrend. We were looking for some mean-reversion here over the last two weeks, but those setups quickly failed. As long as prices are below 8,055, it looks likely that a retest of the 2016 lows near 6,850 is coming.

Here's the sector breaking down to new lows relative to the Nifty 500.

The Nifty Pharma Index remains weak, testing support near 8,000 once again. The more times a level is tested the more likely it is to break, so while some mean-reversion higher may occur in the short-term, the long-term bias is still lower.

Relative to the Nifty 500, we're nearing our downside price target.

Nifty Commodities Index is resolving its consolidation to the downside. As long as prices are below their year-to-date highs, then a messy range-bound trade remains our base case.

Nifty Infrastructure has built a nice base for itself but is failing at long-term resistance of 3,450 as momentum diverges. The most constructive action would be consolidation between 3,150 and 3,450 before an upside resolution.

It has also carved out a nice bottom relative to the broader market as well.

Larsen & Toubro has been a driving force behind this change in character, but it is threatening a failed breakout if it closes back below 1,450 or so. Despite the nice consolidations in many other components, it needs its largest one, LT, to lead. That starts with this breakout retest succeeding and the stock continuing higher.

Metals remain one of the weakest areas of the market, stuck below former support near 3,055. The next major level of support is down near 2,450.

The Nifty PSU Bank Index remains rangebound between 2,680 and 3,400, as most of its components remain a "hot mess".

Despite that rangebound action, it continues to carve out a potential bottom relative to the Nifty 500. An upside breakout above this downtrend line is needed to confirm a trend reversal.

Like the Nifty Infrastructure Index, the largest component of the PSU Bank Index has recently broken out to new all-time highs. If this sector is going to continue improving on an absolute and relative basis, it needs leadership from the State Bank of India.

Media remains a hot mess as well. If prices break support at 1,980, then the risk is down towards 1,450 over the long-term.

Realty is also failing at its former highs of 290 as momentum diverges. The action has been constructive, but rangebound trade between 290 and 240 looks likely in the near-term.

As we can see in the Equities space there are a lot of rangebound markets and very few clear uptrends or downtrends. In the strongest trends there are breadth and momentum divergences that remain a major headwind and need to be worked off through time.

For now, there are opportunities on both sides of the tape. We need to remain selective though, as price action is choppy and a lot of whipsaws are occurring.

In terms of Interest Rates, Developed Market Yields have cratered since October of last year and are now trying to stabilize.

BRICKS  were not immune to this downtrend and sit near their recent lows as well.

Indian Interest Rates look similar, trending lower since October and showing few signs of bottoming.

USDINR has broken back below long-term resistance turned support at 69, suggesting the bias has shifted to the downside and that the near-term risk is down towards 66.30.

The same can be said for EURINR, which is confirming the head and shoulders top that's formed over the last year by breaking below 77.85. As long as prices are below 79.50, the bias is to the downside towards 71.75.

GBPINR has already reached its first level of potential support at 85, but this breakdown confirms the trend is down and that any strength towards 89 should be sold into.

JPYINR looks rangebound at best, but given the weakness we're seeing in the other pairs we can likely expect a retest of the bottom of its 0.6520 - 0.6140 range.

Base Metals remain a mess. Even areas of strength like Zinc have been unable to make upward progress and are trading back towards the bottom of its long-term range.

Gold remains the only standout in the metals space, breaking decisively above resistance and confirming the start of a new long-term uptrend. Any weakness towards 32,400 should be bought, with a target of 37,350.

Cardamom has been a big winner for us but has exceeded our upside objective of 2,722 and is on its way towards 4,050. Any weakness back towards that 2,700 level would be an attractive entry.

Last, but not least, is Natural Gas. This has been more than cut in half since the highs set in Q4 of last year, but is now trying to stabilize as prices reclaim support at 160. As long as prices are above that level, this bullish momentum divergence and failed breakdown are intact and could spark some mean-reversion towards 200.

The Bottom Line: Global Equities as an asset class continues to improve, however, many of the issues in India that we've been writing about extensively over the last 9 months or so remain.

Breadth and momentum divergences continue to ail even the strongest stocks and sectors. Weakness in Small and Mid-Caps continues to suggest risk appetite is weak. Upside participation in major sectors like IT, Fast Moving Consumer Goods, Energy, and Autos continues to be weak.

Until we start to see these things change, we're not going to get a sustained breakout in the major indexes. Banks can't do it all alone.

With that said, this is the market we have and we'll take advantage of opportunities on both sides of the tape as they present themselves.

Be sure to read part 2 of this playbook where we outline our best individual stock ideas at current levels.

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

Allstarcharts Team