Last Updated on Jun 8, 2022 by
Kunal is a fund manager at The Streets, a private fund. He has been in the equity market since 2010, performing various roles such as Associate Research Analyst, Research Analyst, and Associate Portfolio Manager. He has media appearances with CNBC and ET NOW. Kunal is also a visiting faculty in multiple colleges.
Markets are jittery these days and too much volatility is seen in the recent past. Sector specific moves are witnessed & sectoral rotation approach is the must to sail through the storm. Herein I share my bearish view on the Auto sector. To understand the broader sectoral formations, I am analyzing the Nifty Auto index.
Kindly, note that most of the technical charts shared here are on higher time frames and so the view is from a mid to positional perspective.
Table of Contents
Weekly: Time cycle
The weekly Nifty auto index chart is shown here. Since 2013, a typical cycle of approx. 805 weeks (candles) his observed. The first cycle started in 2013 and continued till 2018, showing 1603 candles (Approximately double of 805). The second cycle was between 2018 to 2020 and the ongoing cycle started from the bottom of 2020 till now. As per the historical price behaviour, it seems that the time cycle is due for a change (one more candle is pending). One can expect a trend change on-time cycle due. So far, the last cycle was positive, trend change may bring some price correction in the time to come.
Weekly: Price action
As per the weekly price action, it is observed that the index is finding some resistance near the 12000 zone. 2018 high was approx. near the same zone. The index reached the same zone at the beginning of 2022 and struggling since then to cross the level.
By connecting the most recent lows, formation seems sideways, in which price is taking rejection from the resistance zone. CMP being 11300, support zone is placed near 10500 zone.
Weekly: Price + RSI
By connecting the most recent price tops and bottoms, diametric diamond correction is seen. Alongside, RSI is losing momentum, creating bearish divergence on the chart. A decisive shooting star candle is formed, which is giving more conviction of weakness ahead. The support line (highlighted with a white dotted line) is dangling because the slope of the same is uncertain. Keeping the formations and RSI structure in mind, the decline (price correction from the present zone) seems likely.
On the same price action, MACD is plotted. When the price is making higher tops and equal tops, MACD has completely given up, making lower tops and forming bearish divergence. But the interesting part to note is that it has entered below the zero-line zone. That is a clear indication of more weakness going forward. Any further price decline will push MACD below zero and will hint at more weakness going forward.
A massive trend emerged from the low of 2020 and continued till 2022. The first decline was witnessed during March when the price broke below the Super trend indicator for the first time almost after 22-23 months. Price bounced back but faced resistance right onto Supertrend and ended up forming a shooting star. Clear upside rejection is seen. Supertrend can be considered as the stop loss for the bearish view to begin position.
The Fibonacci tool can help us to find the support – resistance on the chart. From the low of 2020 to the high of 2022, the Fibonacci is showing the support of 38.2% which is taken by the price during the first decline of 2022. Price bounced again and halted near the previous high. The most recent bounce is used to calculate inside support zones. Levels are highlighted on the chart. As price breaks below levels, we can keep trailing stops on the short and expect lower levels (on higher retracement).
Daily: Price Action
The yellow trendline is offering resistance to the long formation of the daily chart. The most recent bounce is forming a channel kind of formation and the price seems to have halted right near the inflection point of both the trendlines. The massive bearish engulfing candle is also seen on the daily chart, which is adding confidence to the limited upside from the present zone.
Ratio chart: Nifty Auto vs Nifty
This is the weekly ratio chart of Nifty Auto and Nifty. After a massive decline in the ratio chart from the peak of 2018, the ratio chart entered sideways consolidation. The most recent price move is also halted near the peak of the resistance. The negative candle is an indication of limited upside and the possibility of downside. This is also supporting the view of the underperformance of the Nifty Auto index in the time to come.
Putting it all together
After looking at the 805 period weekly time cycle, resistance on the weekly chart (as offered by 2018 high), bearish divergence on RSI and MACD alongside diametric diamond correction, MACD entering below zero zone, resistance offered by Supertrend on the weekly chart, and inflection point resistance on the daily chart, bearish time for Auto Sector seems likely. Nifty Auto and Nifty’s weekly Ratio chart is also supporting the sector’s underperformance view in the time to come. For mandate buy, one can avoid longs and mid-term traders can start finding short opportunities within the sector.
Statutory Disclosure: Kindly note that this update is only for educational purposes. It is safe to assume that my personal position, my fund’s position, my client’s position and my relative’s position may be open at the counter. Prefer to take the advice of your financial advisor before initiating any position.
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