Breadth Concerns Weigh On India's Equity Market

JC Parets
February 19, 2020

We've been outlining our thesis for weakness in Indian Equities for over a month now, but that was a tactical call within the context of bullish longer-term picture.

Unfortunately, with the last week or two of action, we've seen an expansion of stocks participating to the downside which suggests this near-term weakness could continue for the rest of the fourth quarter. Rather than the weakest stocks catching up to the leaders, the leaders are now catching down to the weakest names.

Let's take a look.

First, let's take a look at leading stocks that are starting to struggle. Shree Cement is confirming a failed breakout and bearish momentum divergence by closing back below 24,700. While not destroying the strong structural picture, it does suggest near-term weakness is likely to continue as long as prices are below that level.

Click on chart to enlarge view.

Bajaj Holdings & Investment is another name with similar characteristics, closing back below 3,750.

The next category of stocks are those that have yet to confirm a failed breakout and bearish momentum divergence, but look likely to do so. Asian Paints Ltd. foots that bill. Things are okay if we're above 1,835, but below that, the downside risks and opportunity cost on the long side are elevated.

Another category is stocks that showed relative weakness and are now resolving their consolidations to the downside. In other words, these are the stocks leading to the downside.

Here's Hindustan Zinc making fresh lows, halfway to our 152 price target.

Nifty PSU Banks have been a disaster and that continues with Bank of Baroda breaking long-term support near 90. This breakdown is a big deal and suggests the stock could get cut in half again from here over the coming quarters and years.

Looking at our custom Equally-Weighted Indexes, we see a similar picture of deteriorating breadth.

Here's the Equally-Weighted PSU Bank Index breaking to new all-time lows after failing to gain any traction at support.

The Equally-Weighted Nifty Bank Index is moving back towards its 2019 lows after failing to reclaim its 2018 lows.

Here's the Equally-Weighted Nifty Auto Index rolling over again.

Here's the Equally-Weighted Nifty Commodities Index rolling over and breaking long-term support/resistance once again.

The Equally-Weighted Nifty Energy Index is also failing to gain traction at support and making new all-time lows.

The traction we were seeing these many of these indices gain since August has been completely reversed. As longer-term bulls, we wanted to see these gains hold and build on themselves, but that's not what the market is giving us. As a result, a more cautious approach towards Equities remains best.

There still remain plenty of long and short opportunities with reward/risk skewed in our favor, but keeping position sizes small and being aware that whipsaws are more likely in this environment.

Cash works too.

For now, this is the market environment and we'll make the most of it.

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Allstarcharts Team

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