Reliance Industries is the largest component of the Nifty 50 at nearly 12% of the index’s weighting, so when it moves, we need to pay attention.
The stock has come a long way since its March lows, so we want to take a look at where it’s come from and what its recent break to new all-time highs means for its future.
First, let’s start with the stock hitting our upside objective last November. This chart was from a presentation JC gave at the CMT India Summit on November 23rd, 2019. After a massive uptrend and multiple entries/exits along the way, our next price objective near 1,600 was hit and we got out. At that point, our upside target was reached and we moved onto other opportunities where the reward/risk was more attractive.
Click on chart to enlarge view.
From that point on, the stock made no upward progress and fell drastically during the January-March selloff in Global Equities.
Regarding the question of why a 1,600 target? In 2017 when prices broke out of their multi-year base to new highs, we used the Fibonacci Extensions from that consolidation to determine our next upside price objectives. By determining the Fibonacci levels based on the largest and most prominent base for your trading timeframe, you develop a potential roadmap for the stock that you can then adjust depending on how the market reacts to those particular levels. As you see throughout the post, the levels from that 2014-2017 base remain our roadmap for Reliance today.
On March 24th we were seeing finally signs of a bottom in many stocks, including Reliance Industries, so we got aggressive on the long side.
Our thesis then was that as long as prices were above support at 870 (the 61.8% Fibonacci Retracement of its 2015-2019 rally) and momentum was diverging positively, the bias was higher towards 1,150. Our objective was quickly met (and exceeded) as prices got back into their messy range between 1,150 and 1,600 where they stayed until recently.
The next major inflection point was on April 23rd, 2020 when the stock broke out to new all-time highs relative to the Nifty 50. For those unfamiliar with the concept of relative strength, we recommend reading this primer. Essentially, this breakout from a 10-year + base signaled the start of a new long-term relative uptrend in Reliance relative to the broader market. In other words, we expected Reliance Industries to outperform the Nifty 50 as long as this ratio is above its 2008-2009 highs near 0.135.
And that brings us to today, where the stock is breaking out to new all-time highs on an absolute basis. Now that it has cleared our prior price objective of 1,600, we can use it as our new risk management level on the downside. As long as prices are above 1,600, then the stock’s long-term uptrend is intact and our next long-term price objective is nearly 35% higher at 2,340 any any weakness can be used as a buying opportunity.
And on a relative basis, the stock continues to make new all-time highs relative to the Nifty 50. That is evidence of institutional accumulation and support, NOT distribution.
Suggesting that Reliance Industries could rise another 35% from current levels may seem like a bold call, especially since it has doubled off the March lows. But when you consider our thesis that Equities are in the midst of a new Bull Market then it makes sense that the largest stock in the market would be leading the charge.
And with relative strength hitting new highs and our risk well-defined on an absolute basis, even if we’re wrong the reward/risk is so skewed in our favor that any losses are small enough relative to the potential reward to warrant putting on the trade.
The bottom line is, if Reliance Industries is above 1,600 we want to be long with a 6-month target up near 2,340.
If you haven’t read our recent posts on the Small and Mid-Cap Resurgence and Five Bull Market Barometers, we’d highly recommend them as they provide context around our view of Equities as an asset class which will help understand our thesis for this individual stock.
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Thanks for reading and please let us know if you have any questions!