Major Averages Test Overhead Supply

JC Parets
June 5, 2020

We've been writing about how the momentum is to the upside for the last few weeks, but now prices are testing overhead supply across all the major Nifty indices.

If you haven't read our last few posts we'd highly encourage it, as they outlined our shorter-term views within the context of the long-term trends.

If you're all caught up, then let's take a look at the levels we're watching in the Nifty 50 and other indices.

Here's the Nifty 50 running into overhead supply near 10,000. Momentum failed to reach overbought territory despite the more than 35% rally since the index's March lows.

Click on chart to enlarge view.

Given the strong momentum of the last two weeks in India, and globally, we don't want to be blindly shorting this first push into resistance. Remember, it's only "potential" resistance until the market proves that it's relevant. And on top of that, the weight of the evidence continues to point in the direction of erring on the long side of equities as an asset class.

As prices test this overhead supply, here are some questions we are asking.

  1. How do prices react to this overhead supply?
    1. Do they break above it and then consolidate above it?
    2. Do they correct through time and then break out?
    3. Do they correct through price and if so how far do they correct?
  2. What sectors are leading and which are lagging?
  3. Is the action in the other three asset classes confirming what we're seeing in equities?
  4. How does the action in India differ from what we're seeing globally?

Here's Bank Nifty which failed to get back above its 2015-2016 highs of 20,750 this week. Will prices fail at this level and roll over again? That will be a big tell for the broader market as it's the largest sector.

Here's the Nifty Next 50 approaching resistance at 25,150, which is former support and the 61.8% Fibonacci Retracement of its year-to-date decline.

The Nifty Mid-Cap 100 is now dealing with its 2015 highs near 14,000. A successful breakout above this level and the next major level of resistance is up near 16,000.

Lastly, the Nifty Small-Cap 100 is approaching resistance at former support and the 38.2% Fibonacci Retracement of its year-to-date highs. Above that, the next major level is 5,180.

Another thing we're watching is Crude Oil, which is approaching another potential resistance level and managed to get overbought this week. From a risk appetite perspective, this remains a positive data point. Other resistance levels like 1,900 and 2,750 saw very little reaction from price, so we're watching the next logical level of 3,200.

The primary point of this post is to point out that while the short-term momentum has been higher in stocks (and Oil), prices are now at key areas of potential resistance. How prices react to these levels will provide a lot of valuable information about the environment going forward.

In the meantime, while we wait for the market to provide us more information you can review all of our open trade ideas from the last month and beyond as many continue to work.

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

Allstarcharts Team

Filed Under