[India Premium] Smallcap Stock Update

Let's first start off with the Nifty Free Float Smallcap100 Index itself. Prices are at 11-month lows, the 200-day moving average is rolling over, and we're below both our risk management levels of 8,040 and 7,270 on the long side. There have been several bullish momentum divergences over the last few months, however, they've failed to materialize. As long as prices are below 7,270  they remain vulnerable to test 6,100. 

Click on chart to enlarge view.

Throughout the year we've seen an expansion of 52-week lows among its components, confirming the downside price action we've seen in the index. While previous spikes above 20% in this breadth measure have marked short-term lows, prices went on to make new lows as fewer of its components made 52-week lows. In June prices made new lows while fewer stocks in the index did, which is a potentially bullish divergence. With that said, prices have yet to put in a pivot low to confirm this divergence, but a close back above the 7,270 level above would give us that.

We're also currently seeing a bullish divergence in the number of stocks hitting oversold conditions. Fewer stocks are getting oversold as the index makes new lows, which is what we like to see ahead of a reversal.

On a relative basis, small-caps continue to struggle relative to large-caps. The ratio of Nifty 100 vs the Nifty Free Float Smallcap 100 is however approaching potential resistance, which may provide some relief for the index on a relative basis.

Small-caps continue to under-perform mid-caps and the ratio of the Nifty Free Float Midcap 100 vs Nifty Free Float Smallcap 100 is suggesting this trend may have further to go before potential resistance comes into play.

Before we get into individual stocks, I just want to reiterate some points from the conference call regarding sector performance.

Financial Services stocks continue to be an area of strength, with the cap-weighted and equal-weighted versions of the index hitting new highs.

Similarly, the Fast Moving Consumer Goods Index is also hitting new all-time highs on both a cap-weighted and equal-weighted basis.

The same can be said for the Nifty IT Index.

Not all sectors look great though, as indicated by the 10-month + lows in the equal-weighted and cap-weighted Nifty Infrastructure Index.

We're seeing a similar topping pattern in both the equal-weighted and cap-weighted versions of the Nifty Metals Index.

Despite the strength in the several sectors discussed above, we're also seeing a number of failed breakouts due to the weakness in small-caps, like the one in Magma Fincorp and Ramkrishna Forgings. As long as small-cap under-performance continues, it will be a headwind for all potential long positions within this market-cap segment.

Although these names aren't shortable, I wanted to include them to show examples of the weakness we're seeing in some stocks across sectors and industries. The list continues further down as we get into our short ideas.

Long Setups

Lakshmi Machine Works Ltd. continues to consolidate above our previous price target of 7,870. If prices are above that level we want to be long and looking for this trend to continue toward our next price target of 11,865.

Atul Ltd. continues to consolidate within an 8-month range, so we want to be watching for a breakout above 2,980 to signal a continuation of its long-term uptrend toward 3,615.

Firstsource Solutions continues to consolidate below our previous price target of 78.20 after breaking out of a 10-year base earlier this year. We want to be buying a breakout above 78.20 and taking profits up near 123.

Just Dial Ltd. has been carving out a nice bottom over the last two years and looks ready to go higher. We want to be buying a breakout above 622.50 and taking profits at 919.

KPIT Technologies is a stock we want to be buying weakness in as long as prices are above 232.50 and taking profits near 324, at which point we'll reevaluate as our secondary price target is at 472.

Shoppers Stop has yet to continue higher and looks to be at risk of breaking down instead of out, but we still want to keep it on our radar. If it breaks above 625.50 we want to be long and taking profits near 847.

Sunteck Realty Ltd. broke out of an 8-year base in October and has been consolidating above the breakout level since. As long as prices are above 250 we want to be long and looking to take profits up near 513.

Suven Life Science continues to slowly emerge from this long-term bottoming pattern. As discussed in our June small-cap post, we want to continue to be long if prices are above 221 and taking profits near 352.

Tata Elxsi is in a strong uptrend, so we want to be buying any weakness in the stock as long as it's above 1,200 and look to take profits near 1,625.

VIP Industries Ltd. continues to consolidate through time after meeting our upside objective near 467 a few weeks ago. We want to be buying a breakout above 467 which would suggest a continuation of trend toward our next upside price target of 731.50.

Short Setups

BASF India resolved its bullish consolidation pattern to the downside, confirming a failed breakout. Failed signals tend to be great entries in the opposite direction, so we want to be short as long as prices are below 1,915 and taking profits at 1,455.

Godfrey Phillips is breaking a big support level, so we want to be fading all strength in this stock as long as it's below 815 and taking profits near 460.

Granules India is forming a bear flag after breaking down from a 3-year consolidation to confirm a new long-term downtrend. As long as prices are below 105.25 we want to be short and taking profits down near the year-to-date lows of 71.50.

Johnson Controls Hitachi Air Conditioning India Ltd. is another example of a failed breakout signaling a short entry. We want to be selling strength in this stock if it's below 2,245 and taking profits near former support at 1,745.

Uflex Ltd. is also confirmed a failed breakout by closing below its 2010 highs at 332. As long as prices are below that level, we want to be selling strength in this name and taking profits near 223.

The Bottom Line: That is a summary of what's happening in the small-cap space as we see it. As you can tell, this past month or two have pretty much been a continuation of what we've seen all year. The sectors that were leading then are leading now, the sectors that were lagging then are lagging now. We're seeing some positive developments in breadth and momentum to suggest that the Nifty Smallcap Index may be nearing a turning point, however, as of now the weight of the evidence suggests it remains at risk of further downside on an absolute basis, particularly if below the 7,270 level discussed at the top of the post.

As for long and short opportunities among its components, the names discussed above are those with the best reward/risk scenarios and well-defined risk. In the event that what's been working stops, we know where we're wrong and can exit with minimal loss. If you have other names you're interested in, let us know and we'll provide our analysis.

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

Allstarcharts Team