[Unlocked] Nifty Financial Services Deep Dive

Here's the Nifty Financial Services Index on an absolute basis, which couldn't even retrace 38.2% of its recent decline whereas stronger areas of the market have been able to push past it.

Click on chart to enlarge view. 

Despite the Nifty 50 closing in the upper half of last week's range, the Nifty Financial Services Index closed near last week's lows and has not been able to reclaim its October 2018 lows of 10,250. As long as prices are below that level, then the bias is lower and a retest of the lows is our base case.

The fact that momentum couldn't even get above 50 during a 30% rally in prices confirms that sellers remain in control and momentum characteristics remain in a bearish range.

Now that we've established a bearish bias in the index itself, let's start talking about some of the components.

Here's HDFC Bank on an absolute basis, also failing at the October 2018 lows and 38.2% retracement of its recent decline near 955. As long as prices are below that level then the bias is lower, but it's hard to ignore the relative strength here.

The relative chart makes this clear, with the HDFC Bank/Nifty Financial Services ratio making new all-time highs. Momentum is also in a bullish range. This is NOT the type of stock we want to be shorting to express our bearish thesis in the Financial Services sector.

We also don't want to be shorting areas like Insurance Companies that are all holding up extremely well. Here's SBI Life Insurance recently hitting new all-time highs relative to the Nifty Financial Services Index. Again, not the group of stocks within the Financial Services sector we want to be shorting.

Instead, we want to focus on stocks like Bajaj Financial Services which look weak on both an absolute and relative basis. Here's the daily chart failing to reclaim support at 4,875 and breaking down to new closing lows. As long as prices are below support then we can be short with a target near 3,450.

Here's the stock on a relative basis breaking down to multi-year lows.

So we're bearish the Nifty Financial Services Index and expecting a retest of the March lows, representing a 15% decline from current levels.

Our way of taking advantage of it is by finding a weak stock with clearly-defined risk/reward. Bajaj Financial Services foots that bill.

If, however, you need to be long stocks in this sector due to your portfolio mandate, we want own stocks showing relative strength like HDFC Bank or the Life Insurance stocks.

Getting into a few more short setups, here's Bajaj Finance Ltd. If prices are below 1,960 then we can be short with a downside objective near 1,570. The fact that the bullish momentum divergence was unable to spark any upside mean reversion in the stock tells us that larger forces are at work here and more downside is likely ahead.

Here's the stock falling to multi-year lows on a relative basis as well.

State Bank of India remains a hot mess as well. If prices are below the recent highs of 198, then the bias is lower towards 145.

And here's the stock printing fresh lows relative to the sector.

There are other stocks showing relative weakness as well, but the reward/risk is not clearly defined on an absolute basis. As a result, we want to focus on the three names discussed above when shorting the sector.

Some other stocks that are showing relative strength and will likely outperform during this corrective period, as well as when stocks ultimately bottom, are as follows:

Kotak Mahindra Bank, which recently made new all-time highs relative to the sector.

ICICI Bank broke out of a multi-year base 6 months ago and continues to work higher. The bias remains higher as long as this ratio is above 0.032.

Power Finance Corporation continues to build out a base. A breakout above 0.0115 is needed to confirm a bearish to bullish trend reversal, but overall the last year + of action has been constructive.

As discussed, Life Insurance stocks remain the standouts on a relative basis. HDFC Life Insurance has built a multi-year base and recently hit all-time highs on a relative basis. Very constructive action.

New all-time highs on a relative basis in ICICI Lombard General Insurance Company. Not bearish.

And finally, ICICI Prudential Life Insurance which remains constructive, but the weakest of the group. If this is the worst player in the insurance space, it just speaks to the relative strength of this group of stocks.

Overall, the Nifty Financial Services Index weakness remains in focus. Given it's the largest sector in the market, we expect it to be a headwind for stocks as an asset class. It's also worth noting that Financials around the globe remain weak due to Interest Rates staying subdued, so we don't expect India's Banks to behave any differently than the rest of them.

The stage is set for further downside, now let's see how it plays out.

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

Allstarcharts Team