Vedanta Signaling Nifty Metal Index Weakness Ahead?

December 10, 2019

Last week we discussed the potential near-term "oops" in India's major indices and those conditions remain very much intact.

With that being said, today's focus is on one sector and its largest component, both of which look vulnerable to further downside.

Let's take a look.

One of the tools we use for Indian stocks due to how top-heavy the market is are chart overlays of a sector/index's largest component and the underlying sector/index. The largest component in most cases can represent a major portion of an index and act as either a helium balloon or lead balloon, pulling the index up or down on a whim. When their performance diverges, that's when we want to pay attention.

Over the last few months, we've seen a divergence in the performance of Vedanta Ltd. which represents 19% of the Nifty Metal Index. Vedanta is making lower highs as the sector makes higher highs, suggesting that potential weakness could be ahead the group as a whole.

Click on chart to enlarge view.

Some downside price action would make sense given the bearish momentum divergence in the Equal-Weight Nifty Metal Index as it fails at resistance. If sellers were going to take control, this would be a very logical place for them to step up.

With the major indices looking weak and the Nifty Metal Index at key resistance, we're looking for some downside here in Vedanta and the sector as a whole.

Here are the two stocks in the sector that represent the best reward/risk opportunity on the short side.

Here's Vedanta Ltd. looking vulnerable as it's stuck below resistance near 146 with momentum in a bearish range. As long as prices re abelow 150 on a closing basis then we can be short with a downside target near 115.

Here's a weekly chart of Hindustan Zinc showing a bear flag stuck below resistance at 232. As long as prices are below that level on a weekly closing basis then we can be short with a downside target of 152.

There are other stocks that look vulnerable, however, these two offer the cleanest setups where we know exactly where we're wrong and prices are not too far from their risk management level. In the event that we're wrong, then we'll take our small loss and move on.

If the broader market works off this weakness through time rather than price, we'll likely have to reevaluate our view on the sector.

For now, a neutral/bearish approach towards the Nifty Metal Index and its components looks best.

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

Allstarcharts Team