[Chart Of The Week] Financials In Focus

JC Parets
August 26, 2020

Sector rotation has been driving the major equity indices across the globe higher, but they've all got one sector that's holding them back.

Today we're looking at that sector, Financials, to outline why this week's action is important and how we're approaching this segment of the market.

First, let's start with the Nifty Financial Services Index in India, which comprises about a third of the overall market's weighting. Prices have been struggling with this resistance level near 11,300 and are now trying to break out above it to new recovery highs.

On a relative basis, the index is trying to hold above long-term support against the Nifty 100 and turn higher. Outperformance, or at least in-line performance from the market's largest sector would shift this from a major headwind to a major tailwind for stocks as an asset class.

Click on chart to enlarge view. 

And it's not just an India story. Here are US Financials and European Financials, which have also struggled to recover off the March lows. Each of them breaking out above their June highs would be a significant development for stocks all around the globe.

And what's going to lead India's Financials Index there? Its largest component, HDFC Bank Ltd. which is breaking above resistance near 1,090. The stock has tried to do this several times and failed, so we're watching closely to see if this breakout is successful or another failure.

Lastly, it's worth noting that the weakest stocks in the sector are now breaking out instead of down. This is an additional piece of evidence that suggests money may be flowing back into this lagging sector at a more sustainable rate than we've seen in the past.

Given this is an emerging/developing breakout, we want to see follow-through in the days and weeks ahead to confirm that this rotation is real and that we can get more aggressive.

In the meantime, we want to be looking for opportunities to take advantage of this potential rotation where our risk is extremely well-defined, such that our losses are minimal if this breakout does fail.

Here's Kotak Bank pressing up against resistance again. If prices can get above 1,420, the bias is higher towards at least 1,560.

And here's ICICI Bank. A move above 395 on the weekly chart would signal further upside towards its all-time highs of 550.

Here's Max Financial Services Ltd. trying to break out above resistance near 625. A weekly close above that level would signal a confirmed breakout that targets 835.

DCB Bank Ltd. has been a name we've liked as a part of our Small/Mid-Cap resurgence theme. If prices are above 68, the long-term bias remains higher towards 140. Not necessarily actionable today, from this perspective, but a good example of what can happen when multiple themes are combined into one stock with well-defined risk.

Dewan Housing Finance could benefit in a similar way to DCB Bank Ltd. as it has stabilized above 10.00. If we're above that support level, the bias is higher towards 50.

Here's IIFL Holdings Ltd., which would confirm a failed breakdown and bullish divergence if prices get back above 85. If we're above that level, then the bias is higher towards 205.

Bajaj Holding & Investment would break out above 2,750 and target 3,000 and 3,950 if the strength in this sector continues.

We want to continue focusing on stocks that benefit from current themes like Small/Mid-Cap outperformance and potential themes like sector rotation into Financials. The names discussed above have well-defined risk and should benefit if this breakout in Nifty Financial Services is successful.

If not, we know our out and can move onto other opportunities.

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

Allstarcharts Team

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