In our last post, we wrote about two stocks we wanted to be avoided as they’re showing relative weakness.
Today our attention turns to the Energy Sector which is making 1-year lows relative to the Nifty 500. Let’s take a look.
Here’s the Nifty Energy vs Nifty 500 ratio rolling over decisively below the uptrend line from its 2015 lows. This decline comes after three failed attempts to get back above the 61.8% Fibonacci Retracement of its 2011-2016 decline. Momentum is now the most oversold its been since 2015, which indicates that sellers are firmly in control here.
Click on chart to enlarge view.
The struggle for the Nifty Energy Index is broad-based, but Reliance Industries Ltd. is weighing heavily on the sector. Prices failed to get above resistance near 1,600 as momentum diverged and are now rolling over. As long as prices are below that level, then there’s downside risk towards 1,290 and this stock will continue to pull the sector lower.
Despite broad-based weakness in the sector, there are standouts in the Natural Gas space showing relative strength and those have been our focus for the last three months. We continue to think that buying weakness in names like Gujarat Gas Ltd. presents the best opportunity to participate on the long side of this sector.
Overall, the Nifty Energy Index remains at risk on both an absolute and relative basis. If you need to own anything, stick with the Natural Gas names like Gujarat Gas. Otherwise, a neutral to bearish approach in Energy appears best.
Thanks for reading and let us know if you have any questions!