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[Premium] Q2 Playbook (Part 2/4)

July 11, 2020

As we head into the second half of the calendar year 2020, we start from scratch with our Q2 playbook and outline our thoughts on every asset class and our plan to profit in the quarter ahead.

Part 1 of this playbook will cover our macro view, touching on Equities, Commodities, Currencies, and Rates.

Part 2 of this playbook will delve deeper into Indian Equities, going sector by sector to identify the trends that matter.

Part 3 of this playbook will outline the individual stocks we want to be selling within the context of today's environment.

Part 4 of this playbook will outline the individual stocks we want to be buying within the context of today's environment.

For the purposes of this post, we'll be outlining the relevant levels on an absolute and relative basis. This post is organized into long, short, and neutral labels meant to generalize how we'd approach the sector as a whole. The post is organized with the best sectors up front (positive relative strength and momentum) to neutral (mixed signals) to worst (weak relative strength and momentum). Given a lot of these indexes are not actual trading vehicles, note that we're using them for information and as a starting point for further analysis.

For example, if we want to be buying stocks and the Nifty Services Index is showing relative strength, we have more work to do. We can't buy the Nifty Services Index. It doesn't exist. We have to identify which individual stocks are best positioned to take advantage of that overall theme.

Now let's get into the charts.

Here's the Nifty Financial Services Index, which stabilized above 8,350, and has continued to move higher. The next major level of resistance is near 11,900 where we'd expect to see some consolidation, but above that then our next target is 14,725.

Click on chart to enlarge view.

And here's the sector relative to the Nifty 100 confirming both a bullish momentum divergence and failed breakdown. As long as prices are above 1.00, then the bias is higher and we'd want to be erring on the long side of this market. Additionally, as this is the largest sector of the market, continued relative strength here would be positive for Equities.

Nifty Fast Moving Consumer Goods Index continues to trade in a wide range. As long as prices are above 28,000, then the bias is higher towards its 2018 highs of 33,150. Longer-term a structural breakout above 33,150 is needed to confirm the continuation of its long-term uptrend and target 39,600 in the coming quarters/years.

Here's the sector on a relative basis. If prices are above 2.75, then the failed breakdown thesis remains intact and the bias is higher towards 3.25.

Here's the Nifty Private Bank Index, which stabilized above 9,900. The next major level of resistance is near 13,300, but a break above that would signal further upside towards 15,300.

The sector on a relative basis remains positive as long as we're above the March lows of 1.04.

The Nifty Bank Index is in a similar position. For now, if prices are above their 2015-2016 highs of 20,500, then the bias is higher towards 23,700. A break above that would signal further upside towards 28,500.

And on a relative basis, as long as prices are above 1.91, then the bias is higher in this ratio. A big positive for the broader market given the sector's weighting in the index.

The Nifty Services Index needs to be above the confluence of support near 13,100 for us to remain positive on the sector. In the near-term, prices need to break back above 15,100 to open up the potential for us to revisit the index's all-time highs near 17,500.

And here's the Index starting to outperform the broader market once again, just as we outlined a month ago. As long as prices are above 1.30, then the bias is higher and we want to be erring on the long side of this sector.

The bearish to bullish trend reversal in the Nifty Pharma Index remains intact as long as prices are above 9,500. The next major level of resistance is up near 10,700.

And here's the sector on a relative basis. As we wrote a month ago, the sector is undergoing a correction in the near-term but remains in a long-term uptrend. As a result, we want to be looking for opportunities within the sector during this weakness as long as prices are above 0.83. If we break that level, then we may need to rethink our longer-term bullish view.

Here's the Nifty MNC Index, which has a positive bias towards 15,100 as long as prices are above support near 12,500.

On a relative basis, the sector has been correcting but is in a longer-term uptrend and momentum is in a bullish range, so we're keeping our longer-term outlook positive as long as prices are above 1.19.

The Nifty Consumption Index is stuck in the middle of a range. As long as prices are above 4,540, the bias is higher towards 5,175. Longer-term this chart remains messy, so a sustained breakout above 5,200 would be needed to signal further upside is ahead.

On a relative basis, the sector is slightly weaker than the MNC index but in a very similar position. As long as prices are below 0.4668 then this failed breakout is intact and suggests further downside towards 0.435 is likely. At that point, we'll take a look at the sector and see if we can get more positive on it, but for now neutral remains best.

The Nifty IT sector is stuck in a box for now between 12,900 and 16,400. A breakout above 16,400 would require continued strength from TCS and Infosys. In the event that we do get that breakout, our next structural target would be up towards 23,300.

On a relative basis, we continue to patiently wait for this 13-year base to break out. Not there yet, but we have a feeling that it may come in the back half of 2020, so we're watching that 1.50 level closely.

Nifty Energy is finding some resistance near 15,200 as momentum diverges negatively. Longer-term prices need to make a new all-time high to reaffirm its structural trend is to the upside. For now, it's sideways at best so if prices are above 15,200 then the bias is towards 16,600. If prices are below 15,200 (as they are now), then the bias is lower towards 14,000.

On a relative basis, much like the Nifty IT Index, we're watching for this long-term base breakout to occur. We haven't seen it yet, and given the weakness of many other Energy components besides Reliance, it's unlikely to happen until the sector's breadth improves more. The levels for this range remain 1.41 and 1.165.

As we wrote about last week, the Nifty Auto Index is dealing with some resistance near 7,00. That's our line in the sand. If prices are above that level, we can look for further upside towards 9,000, but below that there's downside risk and opportunity cost in being aggressively long the sector.

And on a relative basis, the recent breakout is a slight improvement, but the series of lower highs and lower lows continues. Until we get a move above 0.73, it's hard to have confidence in the sector's ability to outperform longer-term.

The Nifty Realty Index confirmed a failed breakdown and bullish momentum divergence by closing back above 203. That's our line in the sand now. If prices are above that level, then we can see continued progress back towards the top of its long-term range at 300. If prices are below that, we want to stay away as there's risk down towards 142.

On a relative basis, a failed breakdown is attempting to spark some mean reversion...but it's not resulting in much action just yet. When these types of patterns fail to generate any traction, that's generally not a great sign so we're looking for new lows and continued underperformance. That level of support we're watching is 0.0185.

Here's Nifty Infrastructure stuck in the middle of its 2,825 to 3,450 range. If prices are above the lower end of this range, then the bias is higher. If, however, prices break below 2,825 then our approach will need to shift from neutral to bearish as there's risk down towards 2,050.

Here's the sector on a relative basis rolling over once again after spending nearly 2 years carving out a bottom. This could be a breakout retest or a major failed breakout, so we're keeping an eye on it. If prices break back below 0.27, then that would confirm a failed move and shift the bias back to the downside.

Here's the Nifty Metal Index. Our line in the sand here is 2,200. If price are above that, we can see further upside towards 2,900, but below that, the risk is down towards 1,600.

On a relative basis, the bias remains to the downside as long as prices are below 0.202. Unless support is regained quickly, we'd expect this to collapse to the downside like we saw in PSU Banks and Media early in their breakdowns.

Nifty Commodities are testing a key level of resistance near 3,000 as momentum diverges. If prices are below 3,000, then there's downside potential towards 2,600. If prices are above 3,000 then we can see further upside towards 3,550.

On a relative basis, as long as prices are below 0.282 then the bias is lower and underperformance is set to continue.

The Nifty PSU Bank Index is in the middle of nowhere. For now, we want to be fading strength towards 1,900 and buying weakness towards 980.

On a relative basis, this sector remains a disaster. No reason to be looking for outperformance from this sector anytime soon.

The Nifty Media Index has managed to stabilize above 1,100, so the bias is higher towards 1,540. Above that level, we can start to talk about our next upside objective near 2,000.

On a relative basis, its downtrend remains intact and we'd expect continued underperformance from the sector. For now our risk management level here is 0.145. If we start to get back that level, then maybe Media's trend of underperformance is coming to an end.

The Nifty CPSE Index remains weak. As long as prices are below 1,550, then the bias is lower towards 1,025.

New all-time lows on a relative basis suggest that we want to continue shorting this space or at least avoiding it on the long side if below 0.16.

The Nifty PSE Index looks similar, stuck below 2,600. As long as prices are below that, then the bias is lower towards 1,825.

Here's a closer view at that setup, 2,600 is a key level.

New all-time lows on a relative basis as well. As long as prices are below 0.266, then the bias remains to the downside.

Overall, a lot of the themes we've been watching and taking advantage of at the sector level continue to work. On an absolute basis levels may be a bit messy, but on a relative basis it's clear where the strongest and weakest trends are.

Given our longer-term outlook for Equities remains intact, we want to err on the long side of stocks in general which is why we framed most of the trade ideas on the page as "bullish above" this level, even though many sectors are at important inflection points on an absolute basis.

With that said, if some of the short-term risk levels we outlined break and portfolio adjustments need to be made, then we have a list of sectors to be looking for short setups and have clear lines in the sand to trade against in all of the sectors.

That’s it for Part 2. Check out the Trade Ideas Page for a summary of the actionable ideas from this post…and be sure to read all four parts for our full outlook.

Read Part 1, Part 2, Part 3, and Part 4 for our full outlook, and please let us know if you have any questions.

Allstarcharts Team