Tech view: Use dips to add auto stocks despite chip shortage concerns

Maruti Suzuki, Tata motors and M&M may see weakness at current levels, but the medium-term trend is highly bullish

The shortage of semiconductors and chips is hitting the Indian automobile sector hard. After Tata Motors, India's biggest car manufacturer Maruti Suzuki India has slashed output target for September due to a chip shortage.

On Tuesday, Maruti Suzuki said that its vehicle production in September will tumble by 60 per cent. The company, which had earlier cut down production at its Gujarat plant, said the chip shortage will hit production in Gurugram and Manesar plants, effectively forcing the automaker to cut production by 60 per cent. READ ABOUT IT HERE

Consequently, shares of the automaker declined 2 per cent to Rs 6,700 on the BSE. The ripple effect dented other shares as well with stocks of M&M, Ashok Leyland, and TVS Motors slipping up to 1 per cent.

Against this backdrop, here's how you should trade auto stocks: 

NIFTY AUTO INDEX
Likely target:  10,200 to 10,250
Upside potential:  1.50% to 2%

After breaching the 200-days moving average (DMA), the index had signalled a negative trend. However, the bearish sentiment was reversed near the gap-up range of 9,664-9,662 levels, seen in early May 2021, which assisted in building a support base. Now, the index is making attempts to sustain above the 200-DMA, which is placed at 9,998 levels, then we may see a rally towards 10,200 to 10,250, which are its 100-DMA and 50-DMA. The support stays at 10,007 levels, as per the daily chart. CLICK HERE FOR THE CHART
 
Tata Motors Ltd (TATAMOTORS)
Likely target: Rs 306 and Rs 312
Upside potential: 5.50% to 7.50%

The share of Tata Motors lost ground the day it broke the support of 100-DMA, placed at Rs 319.70 levels. Subsequently, it made efforts to conquer the resistance but was unable to defend the selling pressure. The current stock price suggests a reversal near the support of 200-DMA, located at Rs 281.80 levels. The positive bias may see the stock rising towards Rs 306 and Rs 312 levels, which are its 50-DMA and 100-DMA respectively.  CLICK HERE FOR THE CHART
 
Maruti Suzuki India (MARUTI)
Likely target: Rs 6,200
Downside potential:  8%

The formation of a "Death Cross" pattern reflects a negative/ bearish sentiment for the stock, according to the daily chart. The weakness indicates a decline towards the decisive mark of Rs 6,200 levels, which is the neckline for "Head and Shoulder" pattern – symbolizing a bearish outlook, as per the weekly chart. The immediate resistance falls at Rs 7,011, its 100-DMA. The Relative Strength Index (RSI) has emerged above the oversold territory; nevertheless the share price is yet to regain strength. CLICK HERE FOR THE CHART

Mahindra & Mahindra Ltd (M&M)
Likely target: Rs 821 and Rs 835
Upside potential:  2.60% to 4.50%

Until the support of Rs 700 is not violated aggressively, the stock of Mahindra & Mahindra is expected to see higher levels. The current momentum is hovering around 200-DMA, placed at Rs 785 levels, with the Moving Average Convergence Divergence (MACD) trading pleasantly above the zero line. Furthermore, a close above Rs 800 levels may see a short-term rally towards Rs 821 and Rs 835 levels. The immediate support stays at Rs 770 levels. CLICK HERE FOR THE CHART