[Premium] Nifty Energy Index Breaks Out!

First, let's take a look at Nifty Energy, which confirmed a breakout above with a weekly close above 16,000. Momentum, while not yet at overbought territory, is close and well on its way to getting there.

Click on chart to enlarge view. 

Here's the daily chart showing that similar breakout. The 200-day moving average is starting to turn higher, momentum is firmly overbought, and prices are stabilizing above their risk management level. As long as prices are above 16,000 then this breakout is intact and we can look for further upside towards 21,000.

And on a relative basis, the sector is slowly turning up from the middle of its 1.165-1.41 range vs the Nifty 100.  Longer-term, we'd love to see confirmation of the sector's absolute breakout by this ratio breaking out above 1.41. Going to take some time to get there, but that's what would give us even further confidence in this rally.

And if we Equally-Weight the 10 Nifty Energy Index components, we see prices breaking out decisively and making new highs. This is showing us that breadth in the sector is improving and that it's not just Reliance causing this breakout in the Nifty Energy Index (although its massive weighting remains intact).

Speaking of Reliance...we highlighted in our October Conference Call that money was flowing OUT of Reliance and INTO the laggards.

Now that Reliance has taken a pause, prices look ready to resume its long-term uptrend. As long as prices are above their recent pivot low of 1,895, then we think the bias is towards 2,795 in the coming months.

A break below 1,895 would signal further weakness towards 1,600 is ahead. A break above 2,175 would give us further confidence that our bullish thesis is the correct view.

And part of the reason we think Reliance is bottoming here is due to its relative performance versus the Nifty 500, which is retesting its base breakout as momentum diverges positively. If the stock is going to bottom anywhere, it would most likely happen under the current conditions.

And relative to the Nifty Energy Index, the stock remains in a clear uptrend over the long-term.

Outside of Reliance which is in a long-term uptrend, a lot of the recent gains have come on the back of stocks that are in structural downtrends. As a result, putting on new positions at current levels is tough, but we can use weakness in the future (or further strength in some cases) to define our risk and get involved.

Let's take a look at what I mean.

Here's Indian Oil Corp., which found support near 70 as momentum diverged positively. Now with prices at 94 we're right in the middle of support and resistance at 70 and 115-120. At best this is now a sideways trend within the context of a long-term downtrend.

And here's Hindustan Petroleum finding support at 160 again. Longer-term this is a sideways trend above its 2002-2014 base. A lot of overhead supply to get through to make sustained progress to the upside.

Here's Tata Power. Long-term the level of importance is 50, so as long as prices are above that level then the bias is higher towards the top of the stock's long-term range near 150. There's a lot of overhead supply between now and then, so we'd rather be buying weakness towards support as opposed to chasing at current levels.

Same goes for Gail India Ltd. Not much we can do here at 122.50 with prices stuck in a range until firmly above 150-160.

Overall the improvements in the Energy sector are noteworthy and bode well for it longer-term, but in terms of clean setups, we need to remain selective and wait for our pitch. For now, the only attractive intermediate/long-term setup is in Reliance where our risk is well-defined.

During our mid-month Conference Call we'll take a broader look at the entire Oil & Gas and Power stock list that's included in the Nifty 500. Given the improvement we're seeing in the 10 Nifty Energy Index components, it's likely that there are further opportunities in individual stocks that belong to these industry groups but are excluded from the index.

And for those wondering where Adani Green is, well, we kept it out because it's correcting and the reward/risk at current levels is not attractive.

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

Allstarcharts Team