A 90% Chance of Auto Stocks Moving Up This April - Profit Hunter by Equitymaster
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A 90% Chance of Auto Stocks Moving Up This April

Apr 5, 2019

Apurva Sheth, Editor,Profit Hunter Pro

My regular readers will know that once a month I undertake a monthly 'sector check-up' and share that with them. I also did a performance review of my recommendations for my Profit Hunter Pro subscribers earlier this week.

The reason felt I needed to write to you today is I have noticed something fascinating. I will get to that in a minute, first let's see what the sector check-up revealed.

A few sectors stood out in the 'sectoral check-up'. Realty and Banks outperformed on both the short and medium-term time frame.

The secret to trading is knowing what's working and doing more of it. Right now, these two sectors are in the limelight which means one should pick trading opportunities in both these sectors.

However, there are times when it pays off to be a contrarian and stand apart from the crowd.

I believe the Auto sector is giving an opportunity to do this.

The auto sector has caught my attention for quite some time. We even closed a recommendation in Maruti Suzuki for a profit of 7.40% yesterday.

Generated Gains of 7.4% in 8 days

 

The BSE Auto Index topped out at a level of 27,031 in December 2017 and it has slipped lower ever since. But things may be about to change for the better.

There are two factors supporting an advance in April - seasonality and price action. Let's look at each one of them.

Seasonality is the tendency for securities to perform better during some time periods and worse during others. These periods can be days of the week, months of the year, six-month stretches or even multi-year timeframes.

In case of the Auto Index, I have found a fascinating seasonal pattern over monthly time frame. The chart below contains one month percentage returns of the BSE Auto index for the month of April since the index was launched in 2005.

1 Month % Returns of BSE Auto Index In April Since 2005


You will notice that the index has generated positive returns in all but two years - 2005 and 2015. The auto index ended the month of April with returns of -2% and -5% in 2005 and 2015 respectively. The average gains in the month of April across 14 years is 4%.

The index ended on a positive note in 12 out of 14 years or 86% of the time.

If you look at the last 10 years, then the index has closed on a negative note in only one out of 10 years.

This means if we use the past as an indicator of the future then there is a 90% chance that the Auto index will end on a higher note in April 2019.

Knowing that seasonality is in your favour is an advantage while timing the market. But you can't just go by it alone. You need the price action in your favour as well.

Now let's check out what the price action of the auto index suggests.

Weekly Price Chart of BSE Auto Index

 

The index lost one third of its value in slightly more than a year. It slipped from a high of 27,031 to a low of 18,043 by February 2019.

The fall gathered pace once the index cracked below the neckline of the head and shoulder pattern placed at 23,500 levels in September 2018.

It formed a temporary bottom in October but the bears didn't let the index go off the hook so soon. One more round of selling took the index down to 18,043 levels by February 2019.

The index is now forming a falling wedge pattern on the weekly charts. This is a bullish pattern that begins wide at the top and contracts as prices move lower. This price action forms a cone that slopes down as the highs and lows converge.

The pattern is confirmed once prices breakout of the falling resistance line. The breakout is yet to happen however looking at the RSI it seems that chances of an upward breakout are high.

The weekly RSI is forming a bullish divergence with price which indicates that the downward momentum is slowing.

Now, one should keep an eye on the auto index as well as the major heavyweights within the index which have the potential to move the needle in the right direction.

I have figured out one auto stock which could generate gains of as much as 10.45% within a few days just like Maruti did. You can click here to know more about the stock.

Warm regards,

Apurva Sheth
Apurva Sheth
Editor and Research Analyst, Profit Hunter Pro

PS: Almost every year for the past decade, auto stocks have won April. This is your chance to profit from that pattern. Get Apurva's favourite auto recommendation now. Join him here.

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