Tata Power Confirms Head and Shoulders Top

The NIFTY Energy Index is hitting 2.5-month highs relative to the NIFTY 500, lead by Reliance Industries Ltd. (RELIANCE.BO), which makes up 50% of the index and is making all-time highs. With a component making up that large a percentage of the index, it's inevitable that strength, or in this case weakness, of the other holdings may be masked by the overbearing influence of one stock.

Chart showing performance of NIFTY Energy Index vs. NIFTY 500 Index

One holding of the index that looks particularly weak here is Tata Power Company Limited (TATAPOWER.BO), which is now breaking its neckline and completing a 1.5-year head and shoulders topping pattern. The measured move for this breakdown is the height of the pattern from its head to the neckline, which is 27 points. With that in mind, we only want to be short below 76.75 Indian rupees, as above that would confirm a failed breakdown and potential squeeze higher.

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The Bottom Line

Despite the improving relative performance of the NIFTY Energy Index, some of its holdings didn't get the memo and are making new 52-week lows on an absolute and relative basis. Tata Power Company confirmed a long-term topping pattern and looks vulnerable to approximately 35% downside if the pattern's long-term measured move target of 49 is achieved. As long as prices are below 76.75 rupees, we can be short, but above that level, a more neutral approach is best to avoid getting caught in a short squeeze like we saw in some major indexes earlier this year.

Whether weakness continues or prices quickly reverse to confirm a failed breakdown, there's an actionable signal here – it's just that, as of now, price action, momentum and relative performance are suggesting that the higher-probability outcome is to the downside, and therefore, the reward/risk is skewed in favor of the bears.

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