Stocks Fail At 2015 Highs, Volatility To Continue

JC Parets
April 22, 2020

Over the last few weeks we've been outlining what conditions would warrant us getting more aggressive on either the long or short side, and last Wednesday we got our signal to get short again.

After the indexes pressed to new marginal highs late in the week, we've finally gotten some downside follow-through to confirm the weakness we were looking for.

Let's review several key aspects of our bearish thesis and a few ways we're taking advantage of the volatility.

First off, here's Bank Nifty trading back below its 2015-2016 highs near 21,000 after a 34% rally from its March lows. Last week's highs are our the pivot we're using to trade against on the short side. As long as we're below that level then there's little reason to be changing our bearish bias in India's largest sector or Indian Equities as a group.

Click on chart to enlarge view. 

We're seeing similar action among the weakest stocks around the globe.

Here's the Russell 2000 US Small-Cap Index failing to reclaim its 2015 highs/2018 lows near 128. If there was risk appetite in the world for Equities, we'd be seeing this above 128.

The same goes for Emerging Markets as an asset class. Here's the US-based ETF EEM barely retracing 38.2% of its 2020 decline before rolling over again.

If there was confidence in this rally we'd be seeing money flowing aggressively into the riskier Small-Cap and Emerging Market segments of the Equities market. But it's not.

Combine this lack of risk-taking in Equities with the continued weakness in Commodities and strength in Bonds, and we've got a market that's suggesting further volatility/weakness is ahead for stocks.

To take advantage of this we want to be selling stocks and indexes where our risk is very well-defined, like in Bank Nifty and Tata Consultancy. As long as TCS is below 1,810 then there's downside risk towards its 2020 lows of 1,510 and 1,260 if that level fails to hold.

In addition to opportunities on the short side, we're also finding long opportunities for the active trader. Here's Page Industries which could confirm a failed breakdown and bullish momentum divergence if it stays above 17,500. From failed moves come fast moves in the opposite direction, so this stock could very easily get going towards 20,300 and eventually 22,800 if this pattern confirms.

Alpha lives at the extremes, so we're focused on the weakest and strongest names and trading them on both sides of the tape when the reward/risk is skewed enough in our favor to warrant putting money to work.

We'll be covering all of the asset classes in detail, walk through our top/down approach, and share the best opportunities in our Members-Only Conference Call tonight, Wednesday, April 22nd, at 7:00 pm IST.

If you'd like to join us for tonight's call live or catch the recording, start a 30-day risk-free trial.

See you there!

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