Our First Downside Objectives In Stocks Have Been Hit

First off, we should say that a lot of the breadth improvements and base building in the weakest areas of the market have been erased by the last few weeks of downside action. Many constructive periods of consolidation have resolved to the downside instead of the upside, signaling a continuation of their long-term downtrends. Auto stocks were a great example of that. Nifty Media and Nifty PSU Banks as well.

Then on the upside, we have strong stocks in the Financial Services, Chemicals, Cement, and leading sectors seeing weakening upside momentum as they make new highs and ultimately confirming failed breakouts by closing back below our risk management levels.

From the long side, very few stocks remain above our original risk management levels. They've either met our target and are now correcting, or began correcting before meeting our target and have stopped us out.

With that as our backdrop, let's turn to the major indices.

Here's the Nifty 500 approaching our initial downside target of 9,075 as momentum gets oversold. If prices can stabilize here then there's bounce potential up towards 9,550, but a break to new lows would target 8,700.

Click on chart to enlarge view.

Here's the Nifty 100 at support near 11,250. If we're above it, then we can look for a relief rally, however, below that level there's risk of a move towards 10,750.

Nifty 50 has potential support levels at 11,125 and 10,600.

In the Mid-Cap 100 we're approaching support near 16,000. That is our line in the sand on the long side. If we're below that, the structural improvements made over the last 18 months, shifting from a downtrend to a sideways trend, become invalidated.

The Nifty Small-Cap 100 is in a similar situation as Mid-Caps, but it's already breaking below support at 5,700. This is a major area of support/resistance and how prices settle on either side of it will determine if we're looking for longs or shorts.

Coming into calendar year 2020 we were hoping to see prices digest their recent gains and momentum work off its bearish divergences through time, but instead, we're getting a correction through price and sellers are showing enough strength to push momentum into oversold territory.

It's also a concern that Small-Caps continue to underperform, suggesting weak risk appetite among market participants.

With that said, with all of the major indices at potential support now, and an additional level of interest 3-4% below current levels in many of them, we'd much rather be looking for trading opportunities to take advantage of a bounce than adding short exposure here.

In a perfect world, it might make for a better setup if the indices do make new lows, test their lower levels of support as momentum diverges positively, and then put in a tradeable low from there...but the market doesn't care what we want or what would be best from our perspective.

At this point, the weight of the evidence suggests covering shorts and testing the waters on the long side, even if we do see another few percent of downside in the coming days/weeks.

Tomorrow our Premium Members will be receiving an updated view on all the Nifty Sectors and Indices, both on an absolute and relative basis, as well as individual trade ideas to take advantage of the current environment.

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

Allstarcharts Team