[Chart of The Week] A Symptom Of An Ongoing Problem

JC Parets
December 27, 2019

The BRICKS are breaking out, but India is being left behind due to a lack of breadth. Large-Caps continue to perform, but when they pause there are not enough stocks to pick up the slack...so what we get is a messy, choppy 2-year range in the Nifty 500.

As a result, we've been focusing on the stocks showing relative strength...making money on the long side by sticking with the names that continue to trend, and playing the short side when the reward/risk is ridiculously skewed in our favor.

Unfortunately, it looks like we're going to close out the year/decade with the same gameplan as charts like the one below are a symptom of the weak breadth problem India's had for two years.

Here's Reliance Industries Ltd. meeting its upside target near 1,600, attempting another breakout on waning upside momentum, and then reversing to the downside. Look familiar? It should.

Click on chart to enlarge view.

Rotation is the lifeblood of a bull market, but we need to see leading sectors participate at the same time. Instead what we're seeing in India is money flow into and out of sectors/industries quickly, creating an environment where the major indices trade sideways and trading individual stocks feels like playing "whack a mole." Failed moves in both directions as money flows in and out, back and forth.

It's the market we've got...so we can either let it frustrate us, or we can recognize what's happening and take advantage of it.

One way we can do this is by looking for mean reversion opportunities in names like Gujarat State Fertilizer which are an area of support/resistance as momentum diverges. In this case, it's mean reversion on the long side, but for names like Reliance Industries and sectors like Nifty Private Banks, you have this same type of setup on the short side.

Gujarat State Fertilizer and setups like it combine the bullish momentum divergence and failed move setup we use to define our risk and put the reward/risk in our favor. As long as prices are above 68 on a daily closing basis then we can look for mean reversion up towards 85.

Hopefully, in 2020 we can get an expansion of participation in Indian Equities so that the Nifty 500 can begin to trend to the upside as many other global markets have started to.

For now, this is the market we've got. Take advantage of it and make sure that you're respecting risk management levels and sizing positions appropriately so that the whipsaw does not kill you if/when it happens.

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

Allstarcharts Team

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