Is it right time to invest in funds with high exposure to auto sector?

Nifty auto, which is the benchmark for the auto sector was under pressure since January 2018. Though, it tried breaking its crucial level of 8,500 twice that is in the month of October 2019 and January 2020 but failed to strongly break this level. Moreover, it continued its southward journey to make a fresh all-time low at 4,500 marks in the month of March 2020. However, as the markets started to recover amid opening up of the economy, the auto sector began its northward journey. It advanced 4,051 points to close at 8,500 mark in just matter of few months.

From a technical analysis point of view, it created an ‘Inverted Head and Shoulder Pattern’ while Nifty auto was in downtrend. This price chart pattern indicates a trend reversal. This means that it is likely that the auto sector is on a verge of revival.

As you can see from the above chart, it not just created the inverted head and shoulder pattern, but it also breached its crucial level of 8,500. If we try to predict the price action using this chart pattern, then it dictates that the probable price surge would be the difference between the low formed by the inverted head and the neckline. This comes to 4,051.69 points. This means that the Nifty auto index is likely to rise close to 4,000 points in next one and half years to touch 12,500 mark. Though one must be aware of that, it should not breach down 8,500 level. If it does so, then this price chart pattern fails.

Having said that, even fundamentally the auto companies should start its revival amid uplifting of the lockdown, decreasing coronavirus cases in India, and revival in the economy. Therefore, it makes a lot of sense to invest in funds that have higher exposure to auto stocks or funds where the auto sector finds a place in the top three sectors in terms of weightage.