Six Charts To Watch This Week

JC Parets
May 24, 2020

We've been using our "Five Bull Market Barometers" to measure the long-term health of the market and remain in the camp that risk in Equities remains elevated.

In this post, we're going to outline several charts we think will set the tone for the broader market through the rest of the quarter.

First, and most importantly, is the Nifty Bank Index which made new relative lows this week. On an absolute basis, prices are nearing their March lows of 16,100 after failing to reclaim their 2015-2016 highs in April.

Click on chart to enlarge view. 

What we're watching is how prices react to those March lows. Is there any meaningful demand at that level? or does the trap door open and we see a quick move towards 13,500?

A lot of longs are using those lows as a stop or point of reference for their positions...not just in the Nifty Bank Index, but in most indices/stocks that bottomed around the same time. And if the largest sector of the market is taking out its lows, most of the major indices will likely test theirs.

Next, we want to take a look at two sector/thematic indexes that aren't quite as bad as Nifty PSU Banks, Media, or Realty, but are still near the bottom of our long-term relative strength list.

Here are the Nifty Metal and Nifty Commodities Indexes, both of which have been consolidating sideways over the last two months. What we're watching for here is which way these ranges resolve themselves.

Are these bullish consolidations following the short-term bounce we saw in late March and early April? Or is the entire March-May move a bearish consolidation within strong structural downtrends? Our bet is the latter, but if they can resolve higher that would show improving risk appetite among market participants and throw a wrench in our bearish thesis...at least in the near-term.

Sticking with areas of weakness, the other stocks we're watching are those that have been hit most directly by the Coronavirus Pandemic and are therefore a decent gauge of investor sentiment. Basically, if these stocks keep selling off then investors are saying they're pessimistic about the virus and its impact on the economy/markets.

You know the stocks we're talking about. Hotels, Movie Theaters & Entertainment Facilities, Construction Companies, etc.

First is Inox Leisure Ltd, which was making new all-time highs in February before falling roughly 70% since. With that said, prices have recovered above a long-term support level at 185 as momentum diverges positively.  The stock staying above this 185 level is a vote of confidence from investors and a step in the right direction for bulls.

Indian Hotels was also sitting near all-time highs just 6 months ago before losing 60% of its value. If prices can't get back above 70 in the near-term on the back of this bullish momentum divergence, look out below...

Indian Oil Corp. was a disaster even before this virus hit, but is now at a logical long-term support level in the lows 70s. In the near-term it's also sporting a bullish momentum divergence and potential failed breakdown. A decisive move back above 74.25 would be a sign of short-term stability that can be built on over time...but below that level then there's a real risk of the stock experiencing another swift move to the downside.

In addition to these shorter-term bullish momentum divergences and failed breakdowns, there are a number of stocks retesting key long-term support levels on their weekly charts.

One example is IRB Infrastructure, which reclaimed the 59 Rupee level in early April and is now testing it again. We're watching to see how these stocks respond to these long-term areas of demand. If we see the stabilization we'd expect to see then we can add that to the positives column, but if prices blow right through and make new lows...then we're likely in an environment where the downside scenarios discussed in the stocks/indices above are also playing out.

During last week's Conference Call we discussed a lot of the longer-term issues affecting the market and how we're tracking them, but these are the stocks worth watching for information in the near-term.

Bullish momentum divergences and failed breakdowns should lead to fast counter-trend moves in a lot of these beaten-down stocks. They didn't in the PSU Banks, Realty, or Media Indexes when we pointed them out earlier this month, but maybe this time is different.

We'll have to wait and see what the week brings us.

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

Allstarcharts Team

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