We’ve been erring on the long side of stocks for the last 6 weeks, taking trades where the reward/risk is heavily skewed in our favor, but are still seeing mixed evidence regarding the market’s ability to make new highs in the short-term.
While we can’t ignore the structural improvements, some near-term concerns about momentum and breadth remain.
One of the patterns I”ve seen many times is when prices near a key level, make one more high or low within their trend as momentum diverges. I see that potentially setting up in the major indices in the short-term.
Marginal new highs accompanied by a bearish momentum divergence and sideways consolidation or a price correction.
In the Nifty 50 I’ve draw the potential path. Prices could rally into their all-time highs, momentum makes a lower high, and then we stall there.
Click on chart to enlarge view.
One of the reasons I think this is a viable outcome is due to breadth from the most recent pivot low, February 19th.
We really like seeing Financials drive this rally, but they cannot be the only sector. Eventually they will have to consolidate or correct, and when they do, there’s not much rotation happening to hold the market up.
Canara Bank is up 40%+ over this period, which is not sustainable. Without other stocks taking the baton, any new highs will likely be short lived.
Can Financials drive us a bit higher in the near-term? Sure, but it’s going to take some rotation into Consumer Goods, IT, and Autos to get a sustainable long-term rally going in the major indexes.
For now, we’re remaining patient and taking trades in the setups we’ve outlined over the last 6 weeks. Many are in progress, have met our upside objectives, and others have yet to trigger. In our view, those continue to be the best reward/risk opportunities while we wait to see how the major indices react to potential resistance in the near-term.
Thanks for reading and let us know if you have any questions!