[Premium] Support Levels Failing

Here's the Nifty 100, which represents the Large-Cap segment of the market that's been showing relative strength, sitting near support at 11,200 after failing at all-time highs two months ago.

Click on chart to enlarge view.

From a breadth perspective, we're seeing 20% of stocks within the Nifty 100 hitting new 52-week lows despite the index being roughly 9% above its 52-week highs.

We're seeing the same breadth thrust in the number of stocks hitting oversold conditions, which is now roughly 28%.

The same uptick in 52-week lows and the percentage of stocks hitting oversold territory is happening in the Mid and Small-Cap Indexes. As we can see from the charts above, when we see these numbers accelerate, we typically see a retest of those lows and/or new marginal lows in price with fewer stocks making 52-week lows and getting oversold.

We don't have those just yet, so the risk remains to the downside.

Here's the Nifty Free Float Mid-Cap 100 trading below support at 16,030 and closing at nearly 2.5-year lows. While some backing and filling may occur in the near-term, it looks like the bias is lower towards 14,200 over the next several couple months.

Meanwhile the Nifty Free Float Small-Cap 100 is closing at its lowest level since December 2016 and breaking critical support at 5,670. As long as prices are below that level, then the risk is to the downside with price targets of 4,950 and 4,225 over the next few months.

Some sectors like Autos are being hit the hardest, meeting our downside objective near 6,850 and getting deeply oversold. With that said, there's no sign of a reversal just yet.

Same for Nifty Metals, just above our price target of 2,450 and getting oversold once again.

These are not areas we want to be bottom-fishing, but they're also not at levels where the reward/risk is favorable on the short side. The precipitous nature of these declines suggests that we should exercise patience and wait for breadth and momentum divergences to form before trying to position for a counter-trend move.

What is important to recognize is that all of the constructive action in even the weakest areas of the market these last 9 months has been reversed, and then some.

Given the bullish backdrop for Global Equities we've been wanting to err on the long side of Indian stocks, but with most major indexes/sectors getting oversold and breaking support, we're now in an environment where we need to be fading strength, not buying weakness.

There aren't many attractive reward/risk short setups and the trades we've outlined over the last two months are well on their way to their price targets. Now's the time we want to be building a list of stocks showing relative strength that we can play to capitalize on a market bounce.

Then as stocks begin to rally back into broken support, we'll build a list of names showing relative weakness that we want to be fading and taking advantage of the market's next leg down through.

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

Allstarcharts Team