Is it a Good Time to Trade OMC Stocks?

Dec 7, 2021

Brijesh Bhatia, Research analyst

Crude oil prices have fallen recently.

This is good news for our economy. But what about stock prices? Which stocks can be expected to do well?

The logical answer would OMC stocks. But don't be so sure of that.

In this video, I'll show you how OMC stocks move against crude oil and how to trade them.

Watch the video and let me know your thoughts.

Hello viewers. Welcome to the Fast Profits Daily. Myself Brijesh Bhatia.

Well, if you remember, I've done a video on crude oil prices when it was trading around the 82 dollar mark. There was a buzz in the market that it will again hit US$100 mark and I have done a video that it will not happen. Looking at a technical structure that it might test around the 54-55 mark again and the initial target which I was expecting around US$65 we are there now and I still believe that US$54-55 mark can be on cards for the US crude oil prices.

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If we co-relate it with the Indian markets generally, it is said that it is negatively correlated to OMCS, oil marketing companies because the falling crude oil prices impact their margins are due to the inventories.

But when you are trading or investing onto the OMC stocks, do you think that the falling crude oil prices or rising crude oil prices impact inversely? Let's look at the first chart over here.

 

This is the Nifty OMC index stocks. I have taken Reliance, IOC, HPCL, and BPCL. If a just a look at the OMC index, equal weighted OMC index chart, comparing with the US oil prices, they generally go hand in hand.

Though the quantum of percentage rise, percentage fall may differ over here but if I just look at the longer term trend, they generally go hand in hand.

 

It was only once during 2013 if you look at the box over there, during 2013, and to probably 2016 when crude oil prices were falling, that was the only time it had inverse correlation. But if you look at the historical move, they generally tend to go hand in hand.

Again there are various factors to it and if you look at the equity markets, the way Nifty performs, the outperformance of energy, outperformance of other factors into the Nifty which will again impact the momentum on the OMC stocks as well but if I just look at comparing with the oil prices, I see they are directly correlated. The move of crude oil against the move of the OMC index over here, it tends to go in hand in hand.

Now we have seen crude oil right from around US$84-85 mark falling back toward US$65-66. Will it take an inverse correlation with the crude oil prices? So let's look at over here the first equal weighted OMC index chart over here.

 

So we have seen prices correcting right from the highs by around 10-15% and if I look at the crude, it has corrected nearly 20-25% from the higher levels. As I said the quantum of percentage fall and rise may differ over her with the crude oil prices vis-a-vis the OMC index, but here the OMC index are trading at very, very crucial support zones.

If you look at the momentum of over here, it has taken a break out of a long consolidation. Similarly, if you look at the crude oil price, it tends to remain in a range for quite long between US$70-$72 to around US$80-82 and the similar structure for the OMCs. They tend to consolidate in a range. We saw a break out over there. Now it is retesting if you look at the index, it's retesting the breakout level. This is very, very crucial.

The breakout happened in 2020 retested the previous 2019 highs, and again it's going higher now. So I believe still the equal weighted OMC index which we created has a huge room to go on the higher side.

Now, if you look at the RSI on the lower panel over here, this is again the weekly scale and if I look at the 50, every name it hit 50, it tends to attract the buying levels and we have seen again the prices going on a higher side.

It was only once during the 2020 fall it was I would not say one sector has taken a hit but the overall market which has taken a downside and a V-shaped recovery happened, but over here, that was the one time where it didn't took support at RSI of 50 but went down to the lower level. I believe it is a time that it will take support at around 50 levels and we might see higher levels.

 

Now this is an interesting chart over here on your screen. If a just look at the historical move back in 2014-15, it broke the previous couple of resistance zones between the previous highs. Similarly we have seen it now.

Most importantly, during this 2014-15 momentum, consolidation, breakout, it took around 53 weeks to break out the previous highs. Similarly, now, in 2021 as well, it took around 52 weeks, which is very, very similar. 53 weeks to 52 weeks. Okay, plus one minus one week, we generally consider it in the technicals because it might happen during the day. Wednesday was the high, and it broke out on probably Monday or Friday. The week might change. But here 53 weeks versus 52 weeks.

The break out was as per the time historical momentum. It broke out at right at 53 weeks, retested those levels, and went on to the higher level. I believe the similar structure might help over here and history might repeat again. We saw a 52 weeks break out. We retested those levels now, and we might head up to the higher levels.

So one should keep a watch from trading per se. I believe OMCs might play a good bargain buying opportunity over here, and we might see higher levels coming. If you look at the momentum, Reliance, HPCL, IOCL have been outperforming into the momentum, as of now against the Nifty and we might see the higher levels coming on the OMC basket.

So keep a watch on it, and I believe there is an excellent training opportunity. One should definitely look at it. Trade with strict stop losses because markets are very volatile. If you remember, we have seen 6% intraday move a last week when, Nifty opened with 17,000-17,300 and there was a huge ups and downs volatility was there. 6% intraday volatility is very high if you look at the Nifty.

So I would suggest if you're trading, then trade with strict stop losses. That could save your capital. If you are alive into the markets, profits will all come to you.

So signing off, Brijesh Bhatia.

Warm regards,

Brijesh Bhatia
Brijesh Bhatia
Research Analyst, Fast Profit Report
Equitymaster Agora Research Private Limited (Research Analyst)

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