In our April 10th Chart of The Week, as well as in our Member’s Only Conference Call on Thursday, we presented the question of whether the bearish momentum divergences we were seeing in the Nifty 50 and other major indexes would matter or if the market would brush them off and continue higher.
Well, we finally got our answer.
Her’es the Nifty 50 last Wednesday before our Conference Call. Prices were breaking out to new all-time highs as momentum continued to diverge.
Click on chart to enlarge view.
At the index level this seemed like a positive development, but under the surface we continued to see short-term weakness in Small and Mid-Caps. Additionally, our concern that Financials and a few other leading stocks were pulling most of the weight remained.
There simply wasn’t enough rotation into Fast Moving Consumer Goods and IT to support the market if Financials and Energy corrected.
Whether this corrective action is worked off through time or by follow-through to the downside remains to be seen. What is clear though is that as long as the Nifty 50 is below its 2018 highs, the near-term risk is to the downside and we cannot be aggressively long.
We were buying stocks in late February for mean-reversion, pointed out signs of a long-term bottom in early March and became more cautious in late March due to a handful of caution signals starting to emerge.
While the market continued marginally higher over the next month, our concerns remained and we expressed our conservative view by only taking trades on the long side where our risk was extremely well-defined.
With the downside price action over the last week, it looks like price is finally confirming the weakness we were seeing under the surface
While we’re still extremely constructive on India and Equities around the globe, we remain in the camp that short-term choppiness is likely to continue (across the globe) and that patience continues to pay. With that said, in sideways markets there are still individual stocks that will continue to perform well on an absolute and relative basis.
Over the last two weeks we’ve outlined plenty of trade ideas that we think are best suited for this environment and will likely lead if/when the market does eventually resolve higher like we expect.
Remember, divergences don’t matter until they are confirmed by price action. But when they do, it’s worth paying attention.
Well Mr. Market, you’ve got our attention.
Thanks for reading and let us know if you have any questions!