[Chart of The Week] What Does Yesterday's Candle Mean?

First, let's revisit a chart we posted on December 2nd, outlining a near-term "oops" in the Nifty 50 and several other Equity indexes around the globe. Our concern then was that prices had a nice run over the previous few months and were now approaching resistance as momentum and breadth waned, suggesting to us that choppy action was likely.

Click on chart to enlarge view.

Today, we look at the same chart and see that the Nifty 50 has not made much progress since then. Instead, we're finally seeing rotation into Mid and Small-Cap stocks and those indexes have now successfully confirmed bearish to bullish trend reversals.

With that being said, although the breadth improvements and outperformance from Small-Cap stocks is encouraging longer-term, today's bearish engulfing confirms the momentum divergence in the Nifty 500 and suggests that a correction is likely over the next few weeks.

Despite this near-term weakness, the overall trend for Equities as an asset class remains higher globally, including India. As a result, rather than using any coming weakness to get short stocks, we instead want to be noting the areas of relative strength and buying them on weakness.

What would it take for us to change our bullish thesis?

Here are a few things that would suggest we're wrong.

If Small-Caps start to underperform again as signified by new highs in the Nifty 100 vs Nifty Small-Cap 100 ratio. Bull markets are born on broad participation across market-cap segments and Small-Caps outperforming signals that market participants have a strong appetite for risk.

The other part of the bull thesis for India needs to be Financial Services, which make up roughly a third of the Nifty 500 Index. On an absolute basis, as long as prices are above the former highs of 13,625 then the trend is intact, but below that things get messy and elevated downside risk and opportunity cost becomes a factor.

Relative outperformance from Financials would also be supportive of Equity prices in general, but as we wrote in late December, a correction is underway and so we're watching to see if this ratio can maintain its uptrend, base, and then continue higher. If it can't, then that's a major headwind for Indian Equities in general.

The last major aspect of the thesis is Equities around the globe trending higher. As long as the list of new highs continues to expand and show an overwhelming amount of demand for Equities, there's no reason for us to be doing anything other than looking for stocks to buy during times of market consolidation/weakness.

Looking at a proxy like the S&P Global 100 provides a decent picture of what's happening. As long as prices are above 50 in IOO, we need to be buying stocks.

The Bottom Line: Our expectation is for some near-term weakness in Indian stocks, and stocks around the globe, but we want to be buying that weakness as the longer-term trend remains to the upside.

Join us later this week for our Members Only Conference Call, where we'll be discussing areas of relative strength and stocks we want to be buying when an attractive reward/risk entry develops.

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

Allstarcharts Team