Last week we discussed the potential near-term “oops” in India’s major indices and those conditions remain very much intact.
With that being said, today’s focus is on one sector and its largest component, both of which look vulnerable to further downside.
Let’s take a look.
One of the tools we use for Indian stocks due to how top-heavy the market is are chart overlays of a sector/index’s largest component and the underlying sector/index. The largest component in most cases can represent a major portion of an index and act as either a helium balloon or lead balloon, pulling the index up or down on a whim. When their performance diverges, that’s when we want to pay attention.
Over the last few months, we’ve seen a divergence in the performance of Vedanta Ltd. which represents 19% of the Nifty Metal Index. Vedanta is making lower highs as the sector makes higher highs, suggesting that potential weakness could be ahead the group as a whole.
Click on chart to enlarge view.
Some downside price action would make sense given the bearish momentum divergence in the Equal-Weight Nifty Metal Index as it fails at resistance. If sellers were going to take control, this would be a very logical place for them to step up.
With the major indices looking weak and the Nifty Metal Index at key resistance, we’re looking for some downside here in Vedanta and the sector as a whole.
Here are the two stocks in the sector that represent the best reward/risk opportunity on the short side.