Top Down Approach: An Example

The bull market continues unabated & we had four consecutive weeks of rise in Nifty last Friday. The series of higher bottoms is clearly visible in the daily chart of the Index (Exhibit 1). These higher bottoms are the classic hallmark of any uptrend, and our green signal for trading the market from the long side. The last such bottom was made at 9360 on 24th of May 2017. So, as long as this bottom holds, the series of higher bottoms remain effective & the uptrend is likely to continue in all major timeframes.
However, that does not mean all the stocks & all the sectors are equally likely to participate in the bull run. In fact, that never happens. In every market conditions, there are out- & under-performers. The superstars of previous bull runs almost always fall behind during the following bull run & new stocks from new sectors come up to replace them. As practicing technical analysts, it is one of our primary duties to identify the new heroes.
In our previous week’s post (29th May 2017), we identified Tata Global from FMCG sector & recommended to buy it at 145 levels for a target of 159. Well, the target was almost achieved this Friday when it made a high of 158.35. It was fun, indeed!
The FMCG stocks continue to remain outperformers even this week & we are keeping a close watch on them. We however observe that the Auto stocks are also trying to catch up with the momentum of the overall market & this time we pick our weekly recommendation from this sector. This is an example of Top-Down approach where we are first taking confirmation from the overall market condition, then we are identifying the sector based on performance, followed by selecting a stock from that sector.
TVS Motors (CMP: 540)
The uptrend is very clear from the diagram itself (Exhibit 2) & it warrants a buy. The stock on Friday made a new lifetime intraday high but closed near the low of the day. We assume this is a short term weakness & the longer term primary uptrend shall probably continue. So, one may initiate a 50% buy position in TVS Motors at CMP 540 regions, add the remaining 50% at 530 regions, with the stop loss at 516. We are expecting a possible target of 575 in a fortnight.