I believe group or sector analysis is a very useful tool for the short-term traders as well as those who want a build a momentum portfolio. Sticking to the winners is a rewarding approach for the short-term traders because that’s where the momentum is.
- : May 5, 2018
- : Prashant Shah
There are three important aspects of Sector analysis: Price patterns, Relative performance and Breadth of the sector. And if more weight is given to the higher timeframe, we can avoid catching falling knife, or at least we will be aware of that we are indeed doing it.
In the TradePoint software, there is a scoring mechanism for each stock based on the pattern in the P&F charts and the pattern in the Relative strength chart across different timeframes. The advantage with this scoring mechanism is that we can rank the stocks based on their chart pattern and relative strength scores. Below is a table showing price and relative performance of all sectors.
Kindly direct your attention to the last column of the table. The scoring mechanism is designed in such a way that the pattern in the higher box size or higher time frame gets higher weightage. So, a stock or the instrument under consideration must be bullish on different timeframes before it appears in a top of the list.
The IT sector is the top performing sector in the above table. It has been at the top of the list for a few months now and will remain at the top unless the chart turns bearish across multiple timeframes.
Let’s take FMCG sector for example. Ranking is positive because many stocks have done well in the segment. Let’s drill down to find out which stocks in the FMCG space are leading the sector.
The above table displays the list of FMCG stocks with their ranking scores. Once we identify the stocks that have a top score in the FMCG sector, we can trade price patterns in those stocks. Below are few charts from the above list:
PGHH chart is bullish and higher counts are open, continuation breakout will get triggered above 9810.
Jubliant FoodWorks chart is already bullish with open vertical count target. Short-term chart will remain bullish as long as the stock trades above 2440.
Once the performance of stocks in the leading sector turns to positive score, that means price has broken out on multiple timeframes. It is an effective way of picking the momentum.
Recently, Dabur has joined the party and has recorded handsome gains. Have a look at the chart below. Again, there are open vertical count targets and the next pull-back and a breakout will offer a nice trading opportunity in Dabur.
Below is a chart of Britannia, short-term pattern is not too bullish as the price is in a column of O now. The next breakout will give trigger a buy signal and if the FMCG sector continues to have a positive score then Britannia could be the stock to focus on.
The advantage of this process is that we can identify stocks that we don’t usually track in a particular index. For instance, from the IT sector, the top names from sector is what people will focus on. It might be either a Infosys or TCS or may be a HCL Tech or Wipro. Using this approach we have detailed, it would not have been difficult to zone-in on MindTree. The stock had a nice breakout and it appeared in top-performing stock from the IT sector. The same concept was at play with respect to Ashok Leyland from the auto space.
I have seen that once a stock starts leading the sector, it remains the leader during that leg. And such stocks continue to surprise us and produce great returns. It is a very sensible approach to trade continuation patterns in them rather than taking efforts of identifying what can bottom out.
But, psychologically, it is not very easy to keep trading stocks that has already moved up a lot recently. I have however witnessed sectors and stocks remain winners or losers for a very long time. I can give you lots of examples. Maruti for example, remained a top performer in the auto space for many months or Wipro remained an underperformer in the IT segment for a long while even when the sector was doing well.
So, even if the IT sector was identified as a performing sector, buying Wipro would not have generated returns. Or at least, not as much returns as compared to what the leading stocks such as Mindtree or TCS delivered.
I demonstrated FMCG as an example and you can duplicate this analysis for any sector or group. My criteria for trading bullish patterns is that the sector should be positive in multiple timeframes.
You can also track the short-term box-value of RS charts to show what is leading the short term rise or fall. Below is a table showing current leading and losing sectors.
Banks, Financial services and Service sectors are out-performers in short term and CPSE, PSE, Commodities are the underperformers. You can easily find which stocks in those sectors are leading the move and focus on them from a trading or investment perspective.
Remember, the trend of the instrument in the denominator plays a very important role in relative strength analysis. It is a important to know what to look for. For instance, if the Nifty chart is bearish and breaks below important support level, then the focus should be shifted to the leaders of the downfall. The stocks that did not contribute or participate in the rally is where we can identify short-selling opportunities.
I analyse underperforming sectors also just to keep a tab on the stocks that are not participating in the fall. For example, PSE sector is underperforming led by the fall in stocks such as HPCL, PFC and BEL. But the stocks such as Powergrid, NBCC and Concor are outperforming in relation to the sector. I would therefore like to trade breakout patterns in these charts as and when the PSE sector starts performing. Similarly, identify the stocks that are not contributing when a sector is leading. Usually they will underperform the most when the sector starts correcting, HCL Tech and Wipro from the IT index are recent examples.
Breadth is another aspect that should be considered and there are few more ways to interpret the data in this table. I will write more about it in subsequent posts. You can build such tables with other methods as well by analysing multiple timeframes and giving more weightage to the higher timeframe. Usually, rallies will be short lived if there is weakness on the higher timeframe charts.
We have all types of charts in the TradePoint software. But, I found P&F charts to be the best tool to score and rank the patterns. We will continue to build more such tools to make the process of identifying outperformers and underperformers as objective as possible.
To keep it simple: If Nifty turns bearish, look for the stocks and sectors leading the fall or the ones that did not participate in the earlier rally. If Nifty remains bullish and generates continuation buy pattern, then look for the stocks that are leading and the ones which stocks did not contribute much when the Nifty was correcting.
to view video explaining Sector Matrix analysis.