Reminder: Stocks Go Up AND Down

Before we get into the individual levels in the Nifty and other indexes, let's discuss some important long-term context.

First off, last week four of our five "Bull Market Barometers", which are long-term indicators we use to determine whether we're in an environment that's supportive of rising stock prices, flipped into bullish territory.

Secondly, we're seeing a resurgence in Mid and Small-Cap relative performance. Small and Mid-Cap stocks have been in a bear market since January 2018. That's nearly 2 and a quarter years of massive underperformance and negative returns. The evidence we're seeing suggests that this may just be the beginning, which is a major tailwind for equities as an asset class.

Lastly, we've got the largest stock in the market breaking out to new all-time highs. For those keeping track at home, new all-time highs are not a characteristic of a downtrend. Quite the opposite in fact.

And that's just Reliance Industries! The largest 10 stocks in India's market account for 43% of the Nifty 500's weighting...and over 60% of the Nifty 50.

Here's what an equally-weighted basket of those ten stocks looks like. After a rough January-March, the chart is now getting back above former support and the long-term uptrend line it had previously violated. If the largest stocks in the market are moving higher, we CANNOT be betting against stocks as an asset class.

Click on chart to enlarge view. 

With these factors as our backdrop, it's clear that we're in an environment where we want to be using weakness to add Equity exposure as opposed to using strength to add short exposure for our particular timeframe. That's not to say there won't be corrections along the way, there will be. But you need to know yourself as a market participant.

Are you constantly trading in and out of positions? Or are you trying to catch the meat of the intermediate/long-term trend?

From a risk management perspective, let's discuss where our thesis of a new bull market in stocks needs to be questioned (outside of the factors discussed above deteriorating materially).

Here's the Nifty 50 chart we've been using as our roadmap all year. Prices continue to stair-step higher between logical support/resistance levels.

After a sharp rally off the March lows, Nifty consolidated below its 2015 highs near 9,000 for several weeks, then broke above them. After consolidating above 9,000, prices pushed higher towards the next level of 10,000, consolidated, and then broke above it.

So from a short-term perspective, if the Nifty 50 breaks back below 10,000, then there's a risk of further downside/consolidation and we should adjust our portfolios and expectations accordingly.

What that looks like will differ for each individual portfolio, but would include things like tightening up stops on open long positions, taking some profits in open long positions, adding portfolio hedges or raising cash, cutting stocks that aren't working, etc. Whatever it is you do to prepare your portfolio for a period of increased volatility.

For the Nifty Next 50, the level is 25,000. If prices are above that, then the bias is higher and any weakness can be viewed as an opportunity to add long exposure.

In Mid-Cap land, 14,000 has been our level and we're firmly above it still. Momentum has also gotten firmly into overbought territory, confirming the strength of buyers. As long as prices are above this support level, then the bias is higher with the next major level of resistance near 16,000.

For Small-Caps our level remains 4,300. If we're above that, then the bias is higher towards 5,200.

Just as not every day of buying was a turning point on the downside, not every day of selling is a turning point in the current uptrend in stocks.

We adjusted our views gradually as the weight of the evidence shifted from bearish to bullish, so our views will also change gradually if and when prices break through the support levels outlined above and the weight of the evidence begins to shift from bullish to bearish.

For now, there has not been enough weakness to justify questioning the current uptrend in Indian equities. Whether that'll still be the case in a couple days, weeks, or months is anyone's guess.

What we do know for sure is that stocks go up AND down, not up OR down.

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

Allstarcharts Team