[Chart(s) of The Week] No Man's Land
Before getting into the current environment, I want to refer back to a post back in October 2018 when we were waiting for momentum and breadth signals to confirm a tradeable low. When we finally got it later that month, we were aggressive on the long side and were rewarded for our patience.
Today we're very much in a similar situation as there are many bullish momentum divergences forming in major indices/sectors/stocks as they approach support, however, today the major indices are stuck BELOW support as opposed to approaching support.
That doesn't make the bullish momentum divergences any less valid if they confirm they confirm. What's difficult is to define our risk and construct an index trade with an attractive reward/risk with prices stuck in the middle of our risk management level and downside price target.
The Nifty Free Float Mid-Cap 100 is a great example of that, with prices sitting at 15,350, our downside objective near 14,200, and resistance overhead at 16,030. So while prices could bounce from here, it's tough to define our risk and only have a few percentage points of upside before prices run back into former support.
Click on chart to enlarge view.
The other problem is that while we're seeing many momentum divergences develop (and few have been confirmed by price), we're not seeing the same type of divergence in our breadth measures just yet. On the initial break of support earlier this month, the number of stocks in the Nifty Free Float Mid-Cap 100 hitting new 52-week lows spiked to nearly 20%. While certainly an extreme level, history has shown us that we typically see prices retest their low, or make a new low, at which point we see fewer stocks making new lows. That's the divergence we're looking for, but it's still in the works.
So while many indexes/sectors/stocks are hitting their downside price objectives as downside momentum wanes, it's hard to call a bottom just yet. We still need to see more evidence of a tradeable low being in, like we did last October, before getting aggressive.
With that said, at current levels, we'd much rather be erring on the long side than the short side and would focus on individual stocks where our risk is well-defined and reward/risk is skewed in our favor.
Now that could look like buying a breakout in stocks like Tata Consultancy (above 2,260 & target 2,690) that have held up well during this correction.
...Or it could look like playing for a counter-trend rally in some of the beaten-down names like Castrol India (if above 113.30 & target 135) which have met their downside price objective and are showing bullish momentum characteristics.
There are a lot of stocks that fit into one of these categories, so those are the ones we are focused on as opposed to getting chopped up in messy stocks that aren't trending.
It's a tough environment, but if you can't be in cash then these are the types of opportunities we'd be looking for while keeping in mind that this environment is ripe for whipsaws and shakeouts in both directions.
We need to take that into account when assessing our risk management approach and position sizing. In this market especially, "feeding the ducks" when trades begin working is also good strategy to take your initial risk off the table and protect capital.
This is the market we've got, so we have to work with it. We're on watch for a bottom and have a list of potential long opportunities as opposed to fresh shorts, so let's see how things develop.
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Allstarcharts Team