Last Updated on Aug 23, 2022 by Anjali Chourasiya
This article is authored by Kunal Rambhia, a fund manager at The Streets, a private fund. He has been in the equity market since 2010, in various roles such as Associate Research Analyst, Research Analyst, and Associate Portfolio Manager. He has media appearances with CNBC and ET NOW and is a visiting faculty in multiple colleges.
The super strong and long rally continued till last Thursday, followed by profit booking on Friday. Indices saw a decisive sell-off right from resistance and profit booking makes sense in the present hour. If the market continues to decline, it can be a good time to find weak counters for the short term and make some good profit. Herein I share my bearish view on Maruti Suzuki to take advantage of the price decline.
Table of Contents
Weekly: Price action
Since 2020, Maruti’s prices have kept moving in an uptrend, making higher tops and bottoms. Trendlines have been offering perfect support and resistance to the counter in the last 2 yrs. Recently, prices have reached resistance and are facing rejection. This rejection is also from the previous high. The price has been witnessing rejection for the last five weeks, making the present zone a strong resistance. A couple of shooting stars are adding to more bearish confidence. The set-up is just perfect for initiating a bearish position with favourable risk-reward.
Weekly: Fibonacci
From the peak of 2018 – 2019, the decline emerged and bottomed during 2020. From the bottom, the bounce is seen now. The reverse Fibonacci is applied on the same to check the resistance levels. The recent top is formed right near 88.6%, and rejection has been strong for a long time, making it a valid resistance zone.
Weekly: RSI and MACD
RSI is a momentum indicator. It helps to understand the strength and momentum of the counter. It is very clear that the price is making a higher top, and RSI is making a lower top, creating bearish divergence for the counter.
MACD is a lagging indicator and is used to check divergences and the emergence of the trend. Again, with price making higher tops, MACD is making a lower top and highlighting the perfect bearish divergence just like RSI. It is adding more conviction to the bearish view.
Daily: Price action
In the entire rally from the low, the volume participation was moderate. In fact, when the price made a top above the previous high, the volumes were almost near to average, making it a bullish trap. The formation on the price action of the daily timeframe chart is rising, expanding wedge near the previous high, making it a perfect bearish formation.
Daily: RSI
The weekly price action showed bearish divergence. Its immediate lower timeframe daily chart also reflects the same. RSI is also clearly downward sloping and falling below 50, indicating more weakness likely to creep in. On the breakdown of patterns, one can initiate decent momentum trade.
Daily: MACD
MACD is showing bearish divergence and also bearish crossover. Again, the trend reversal is likely to get confirmed on the support trendline breakdown.
Weekly: Ratio chart of Nifty and Maruti
Since 2018, Maruti has underperformed Nifty. Recently, the Nifty decline was exceptional when Maruti remained muted. But again, after making the recent bottom, price action on the Ratio chart bounced and confirmed outperformance of Nifty over Maruti is likely.
Daily Ratio Chart: Maruti v/s Nifty
On a daily timeframe, the trend continued until the recent breakdown and retesting the same. The breakdown confirmed the outperformance of Nifty over Maruti (Nifty being in the denominator of the fraction) even on a shorter timeframe.
Putting it all together
Weekly chart with shooting star near the resistance trendline and previous high, coinciding with 88.6% of Fibonacci reverse retracement, bearish divergence on RSI and MACD, all these observations are supporting bearish view on the counter. The rising and expanding wedge on the daily timeframe chart with bearish RSI Divergence, RSI pointing downward below 50 and with bearish MACD divergence with MACD crossover, reflects the same. The ratio chart of Nifty and Maruti daily and the weekly chart also supports weakness going forward.
Note that a bearish view can be valid for short-term to mid-term to positional-term and needs regular review. Prefer to keep booking profit if the trade turns out well.
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 on the counter. Prefer to take the advice of your financial advisor before initiating any position.
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