The Definition Of Falling Knives

JC Parets
May 5, 2020

As Market Technicians, we don't like catching falling knives. Today we want to reiterate several areas of the market that we either want to stay away from completely or even be shorting if you're into that sort of thing.

Plus we'll add a new index sector to our watchlist that's in danger of becoming a "falling knife" of its own.

Here's the leader of the weakest stocks, Nifty PSU Banks, breaking down to new all-time lows on an absolute basis. When bullish momentum divergences fail to spark any sort of upside traction, that shows that sellers are remaining aggressive even at lower prices and that the downtrend remains firmly intact. If prices are below their recent lows of 1,220 then we're looking for further downside towards 1,010.

Click on chart to enlarge view. 

Here's the sector relative to the Nifty 100 crashing to new all-time lows. What an absolute disaster this sector has been.

Nifty Media isn't much better, breaking down from its short-term bear flag. If prices are below 1,205 on an absolute basis, then we'd expect a retest of the lows near 971 and an eventual break to new lows that targets 830 over the coming 6-8 weeks.

Here's the sector making new all-time lows on a relative basis as well, despite several attempts by price and momentum to turn higher over the last few years.

Realty is another major laggard. Below we have a chart of the sector's largest component, DLF Ltd., failing to reclaim broken support and now beginning to roll over. The Realty Index couldn't even retrace enough of its decline to retest support and is already making new lows. A test of the 2016 lows looks inevitable as long as prices are below 200.

And here's the sector index making new all-time lows on a relative basis.

By avoiding these sectors on the long side over the last few years, we've saved ourselves a lot of headaches. The market remains at risk here and the weakest sectors are once again leading to the downside and could fall another 10-20% in the days/weeks ahead.

We're not here to catch falling knives or be right about calling a top or bottom, we're here to make money. And we do that by riding the strongest trends as long as they're intact, which in the cases above, they most certainly are.

Now that we've reviewed those disaster areas, let's look at the Nifty Metals Index which is at risk of beginning a "falling knife."

Here's the sector relative to the Nifty 100, sitting near all-time lows. Momentum is diverging positively, but prices have yet to gain any upside traction and remain at risk as long as they're below all of the former support at 0.202.

This base breakdown looks similar to Nifty Media on a relative basis prior to its massive decline. Despite a break of support, prices didn't immediately collapse. Instead, they hung out for a while and finally accelerated lower after buyers failed to reclaim support.

Nifty Commodities is in a similar position but is being helped out slightly by its exposure to Reliance Industries Ltd. With that said, it's still stuck below broken support and remains at risk if it cannot reclaim 0.282 soon.

Nifty Infrastructure remains the most constructive of the three, actually working its way to new highs...not lows. So if we have to be short any of these then we want to be leaning towards Metals.

The point here is, if Nifty Metals and Commodities don't reclaim their broken support levels soon, they remain at risk of a much steeper relative decline in the weeks and months ahead. And if that's the case, we'll be right here to take advantage of it.

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

Allstarcharts Team

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