Today we’re exploring opportunities in two beaten-down sectors that look ripe for a squeeze.
We want to give everyone an inside look to the work we’re doing in India. Here is a quick example. I hope it gives you some insight as to how we approach different markets using the same process.
It’s not often that we try to capitalize on counter-trend moves, but in situations where the following conditions occur, the reward/risk is often skewed enough in our favor to offset their lower-probability nature.
Today we’re looking at two sectors that foot the bill: Autos and Media.
Here’s the Nifty Auto Index, which has been trying to gain traction over the last few months, with sharp rallies coming along the way. Recently prices made a lower low as momentum diverged. If prices can get back above 8,055, that would confirm the failed breakdown and bullish momentum divergence and target roughly 9,000 on the upside.
Click on chart to enlarge view.
On a relative basis, it’s interesting that the Nifty Auto vs Nifty 500 ratio has found support right at our downside target as momentum diverges positively. As long as prices are above that 0.8163 level, the bias looks to be higher towards the 2012-2013 lows.
One name we like in the space to take advantage of this theme are Minda Corp., which recently confirmed a failed breakdown and bullish momentum divergence of its own. If prices are above 107.75, the bias is towards 125.
Maruti Suzuki has a similar setup. We can be long above 6,415 with an upside target near 7,200.
The Nifty Media Index looks similar, though its relative chart isn’t nearly as attractive. On an absolute basis, prices have tightened up after making new marginal lows below 2,070. If they can break back above 2,070, we can be long with an upside objective near 2,500.
One name we like in the sector is PVR Ltd., which undercut support at 1,650 and is quickly reversing higher. The fact that momentum did not get oversold during this correction helps reiterate the strength in this name. We want to be long above that level and taking profits near 2,020.
If you’re looking for a more mean-reversion oriented play in the space, we like Network 18 Media, which we can be long if prices are above 28.05. That would confirm a failed breakdown and bullish momentum divergence that targets 33.50.
Different environments call for different playbooks. We’re not dogmatic in our approach, we simply care about finding reward/risk opportunities skewed in our favor and managing risk in them.
Today it’s mean-reversion setups in Autos and Media, tomorrow it might be something entirely different.
For now though, we want to be erring on the long side of these stocks if they’re above their respective risk management levels.
Thanks for reading and please let us know if you have any questions.