[Chart(s) Of The Week] Lower Low Achieved, Now What?

Let's start with the Nifty 500 as our broad measure of Indian Equity performance. Now that prices have made a lower low, there are two key levels of support that we're watching: 8,400 and 8,700. More importantly, however, we want to note that momentum did not diverge by forming a higher low. Instead, the oversold reading got even more oversold, signaling continued aggression on behalf of sellers.

If we look at examples from the last two years we see that initial oversold readings are rarely "the bottom" in price. Instead, intra-day volatility typically stays high, but daily price ranges compress before a resolution in one direction or another. That tells us to expect continued "choppy" price action, which will be frustrating in the near-term, with ultimately set up for a more sustainable move once that range resolves itself.

That brings us to the two scenarios we're looking at.

Scenario #1 is one in which prices settle into a range between 8,400 and 8,700, chop around for several weeks, momentum ultimately diverges positively, and then prices resolve to the upside by closing back above 8,700 (or whatever the top of the range has been). This is our base case and what we're looking for to get aggressively long stocks.

Click on chart to enlarge view.

Scenario #2 includes the same type of volatility in the near-term, but instead of an upside resolution leading towards a move back to the top of a multi-year range, we get a breakdown that signals the beginning of a much larger decline and beginning of a long-term downtrend.

Overall, our gameplan from last week has not changed. Although many of our downside price objectives have been met in the major indices and individual stocks, we're still seeing fresh breakdowns and weakness finally hitting any stocks that have stayed strong.

The market is telling us that this is not the environment to be swinging to the fences. For now, we're staying defensive by keeping position sizes small and being aware that whipsaws are more likely in this environment. Cash works too as we wait for more attractive reward/risk entries on the long side to develop.

Being down a lot in a short period of time is not a good enough reason to be buying stocks. It's a starting point, but what's low can always go lower so we'd rather wait for more favorable conditions to develop, even if that means not catching the exact bottom in price.

When we start to see downside participation diminishing as opposed to expanding and the number of bullish momentum divergences in the major indices and across sectors/individual stocks growing dramatically, then we want to be buying stocks. It's going to take several weeks for these conditions to develop, so we're still in the mode of capital preservation.

In our upcoming Members' Only Conference Call we'll be going through all the indexes, sectors, and major individual stocks outlining risk management levels and potential targets for both scenarios discussed above. We'll also be discussing global markets, as well as alternative asset classes like Commodities, Currencies, and Fixed Income as usual.

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

Allstarcharts Team