Capture Trends
Indian auto sector decelerates PDF Print E-mail
Written by George Albert (as published in   

April 26, 2010: At some point every automobile gets low on fuel. It has to slowdown get into a petrol pump and fuel up. The auto sector is acting the same way.

The sector has been speeding away to new highs with out any major correction. The stock market however had some decent corrections on the way up. The lack of a strong correction shows that auto sector carries reactive strength to the broad market. Such a scenario tells technical traders and investors to go long the sector. But not so fast. Remember that markets are mean reversion animals. What this means is the prices overshoot and undershoot fair value all the time. Hence, it's prudent to wait prices to fall before taking positions in individual auto stocks.

In fact, the strong upward momentum of the auto sector index is slowing down. This can been seen on price and as well as the indicators. Let us look at the price first. Notice that the green upward channel on the left is much sharper and wider than the one on the right of the chart. This clearly shows the most recent price action is slowing down. 

Now a look at the indicators. The directional movement indicator that shows the strength of a trend is sloping downward. This is shown by the black line which indicates that the uptrend is getting weak. Also notice that the red line which shows negative force of the market is moving up, while the green line that shows the positive force is moving down. A crossover will indicate that the trend has reversed. 

Next let's look at the commodity channel index (CCI). The CCI has remained over bought during this uptrend, but that often happens with a strong rally. However, notice that the CCI has now fallen below hundred, which technical traders take as a signal to sell or short the market. Additionally, there is slight negative divergence with the CCI showing lower highs and price showing higher highs. This indicates the weakening of the rally.

The price action, direction movement indicator and CCI are setting the market up for correction, into which we could take long positions. The blue lines are areas where we'd take long positions. They are arrived at using a combination of demand and supply areas and Fibonacci ratio sequences.

Chart analysis

Auto sector