Friday 31 August 2018

REC Ltd. - A Story of Cyclicality, Reversal and RSI Positive Divergence


Cyclicality is an interesting concept. Entering a stock when it is at the bottom of its cycle takes courage, sound understanding of the market’s pulse and a lot of guts. Execution takes places on the basis that the worst has happened and what is left to happen is only possible good or nothing. Cyclicality is prevalent in the stock market and does not receive as much credit as it deserves as an investment ideology. 


A prominent analyst who uses cycles to make his stock picks is Mr. Prashant Jain, ED & CIO, HDFC Mutual Fund. I came across an article on Value Research Online which states that he “has a history of being ahead of the markets" and "he has been able to do this by positioning his funds for the next cycle.” I was researching on REC Ltd. and turns out Mr. Jain pickes this stock not long back in May, 2018 itself. The article further observes, “The markets in India have moved in cycles that play out over six to eight years”. I agree with the idea, maybe not with the number since the duration of a cycle in different sectors or markets may not be consistent due to varying drivers.

REC Ltd. is showing signs that indicate a trend reversal. The stock has corrected nearly 60% from it's May, 2017 high of ~225 and forged a pin point low near ~90.
In the past two instances of trend reversal also, the stock turned up to give multi-fold returns after correcting approximately 60% from its high. The same has been put in the table below for your reference. The following chart hold arrowed indication of the tops and bottoms mentioned in the following table. 


Chart 1 REC (Weekly) captured on 31.08.18. Showing the past tops and bottoms
Now that we have established the possible end of the correction phase in this stock, let’s turn to the cluster of evidences indicating the beginning of an uptrend here.

[These are objective technical observations without any reflection on the fundamental standing of the stocks. My preliminary understanding is that besides the possible recent plea of restructuring (parivartan) which the government and REC have taken to the RBI, the mount of debt on the company and on the power sector as whole, is worrisome. But because changes in price trends usually occur in charts before the fundamentals start reflecting a turnaround in any company, we will keep an eye out to pick signs of improvements in the books]

Chart 2 REC (Daily) captured on 31.08.18, Showing RSI positive Divergence, spurt in Volumes and Breakout
In the above chart, there are three significant evidences which make me believe the stock might have bottomed out. Let us look at them in details:
  1. RSI positive divergence – The point at which REC bottomed out most recently was accompanied by a higher-low on the RSI. The positive divergence is a very effective RSI behaviour and has been an effective leading indicator of a bottom. It is obviously not the Holy Grail or a fail-proof technique, but, the success rate definitely beats it's peers. The positive divergence has been shown using the two slanting lines on the chart. The price was seen making a lower-low while RSI forged a higher-low thereby indicating strong upside momentum in the stock despite declining prices. Soon following the positive divergence we saw a one-sided strong rally which took the stock of REC very close to the previous high marked on the above charts by blue and pink arrows respectively.
  2. Breakout with high Volume- Volume has been showing good support to this trend reversal. We can observe two clear volume spurts on the recent volume data in the above chart (indicated by the box). A close observation of the price and volume behaviour shows that not only has volume been picking up on the up moves in price (indicating strong consistent buying called accumulation) but also, volumes declined upon consolidation.
  3.  Breakout- The price has shown a breakout above the level of 118 which was the resistance zone and that with strong volume. This move above the recent high formulates a higher-high. To further substantiate this trend reversal I am hoping to see further gain in prices followed by a correction which holds above the previous low. For now, the stock continues to inch higher.

Now moving on, let us discuss the potential resistance zones on the chart.  
Chart 3 REC (Daily) captured on 31.08.18, Arrow marking the important support/resistance at importance price levels
The above chart highlights two zones of resistance at 150 and 186 respectively. The past instances of price reversals at these zones has been highlighted by arrows for your reference. I believe now that the price has surpassed the resistance of ~115 after taking resistance, showing a pullback and subsequent breakout with volume support, 115 should act as the new support level.

If you look closely at the above chart, the blue line running through represents the 100 EMA. It lies at the level of 115 thereby reinforcing the role of the level as an important support for the price.

This is all I have to say about this stock, REC Ltd.

Thank you for reading. I would appreciate your feedback and comment on this post.

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As a disclaimer, this isn't a stock recommendation but a mere observation of a great phenomenon unfolding on the chart.
Another disclaimer: I am not long on this stock. 
A warning: Anyone investing on the basis on this article will be doing so at their own risk. Please be responsible.

You can reach me at kchamaria1993@gmail.com for analysis of other stocks (NSE, NYSE, LSE as long), commodities or currencies, I will try my best to respond.


Tuesday 28 August 2018

The Hot Retailer Stock That's Turning Heads of the Big, Bad Investors!


Hello readers!

Thank you for the support and encouragement sent by you guys on my previous blog post on Balrampur Chini posted on 24th Aug (Link)

I have a quick post today on another stock which is making a buzz already. The big investors are already in on this for their share of this hot cake retailer chain.  I am talking about Future Retail!
Besides the hot-shot stories spinning out (Read more here) for Future Retail’s stock, the technical indications are also riding strong. It appears to be starting of the next big up-leg in the stock.

Let’s look at the cluster of evidences closely.

Future Retail daily chart captured on 28.08.18, cmp- 556.50
FRETAIL's stock has been in a consolidation for nearly a year now. During this period, the stock has found consistent and strong support at the level of ~470 and resistance at ~640. Going by that alone, the stock has decently taken support at the said level and turned higher making its path to the first resistance zone of 640. 

FRETAIL- 28.08.18 Daily chart close by view
Having established that stock is heading higher, lets establish why I think this move is a sustainable move.
Two answers:
1) The Break-Away-Gap
2)  Strong Volume on the Gap day

The gap up is a significant move here because the prices has been resisting the trio of 35,50 and 100 EMAs indicated by the blue, purple and red lines on the chart respectively. The gap not only let the price break out of this consolidation but also let it surpass above this cluster of moving averages. Now for those who are confused, moving averages are trailing averages of the past price data and pose as good support/resistance zones and also as lagged indicators of price movements. (Read more here)
The occurrence of this  gap with a strong display of volume (you will notice a tall green bar at the bottom of the chart) shows that there is active buying interest in this stock.

I am not laying down any potential target level for FRETAIL because I look at it as a long term opportunity unlike Balrampur Chini which was more like a medium term bet with a mere 100% rally outcome as per my study.

Let's also update you on how our Balrampur Chini analysis is doing.

Balrampur Chini - Captured on 28.08.2018 (Update 1)
The first post on this stock was posted on the 24th of Aug (Friday). After the post, at around 2:00 PM the stock was seen giving a strong run-up and closing +5% up. In the last two days the stock has been resisting the 100 EMA and as mentioned in the post on Friday, we continue to watch out for a breakout to confirm our analysis.

That's all from my end!

As a disclaimer, this isn't a stock recommendation but a mere observation of a great phenomenon unfolding on the chart.
Another disclaimer: I am not long on Fretail but long on Balrampur Chini.
A warning: Anyone investing in either stocks based on this article will be doing so at their own risk. Please be responsible.

The above observation is purely technical. Anyone with a fundamental insight on either stocks is invited to share the same, we can put up a collaborated article ( no pay for that :p).

You can reach me at kchamaria1993@gmail.com for the analysis of other stocks (NSE, NYSE, LSE as long as there is a chart), commodities or currencies, I will try my best to respond.

Until next time, Adios! :D






Friday 24 August 2018

Balrampur Chini: Bottom fishing (A study of range shift in RSI)

Hello friends!

I am back with a post after a long period of dormancy. I was never off practising TA but wasn't writing about it for various reasons (like laziness). But now it's time to dust our sleeves and get back to business.

I have spotted a compelling chart which really got me out of the dormant state and urged me to post about it!

That stock is Balrampur Chini!

Please refer to the chart below:
Balrampurchini Daily Chart captured on 24.08.2018
I am a huge fan of the momentum indicator - Relative Strength Index (RSI) and it was RSI's range shift phenomenon which has drawn my attention to the chart of Balrampur Chini.

In the above chart, you will notice arrows marking the beginning of major rallies. These arrows are actually highlighting the range shift in RSI - the phenomenon wherein RSI breaches the overbought zone of 60 to indicate higher momentum in the stock at relative price lows and at the end of corrections. This change in stock participant's momentum- where the buying momentum supersedes the selling momentum, is captured by RSI beautifully.

On the chart we can see that out of the past 4 instances, only one instance has been a failure where the range shift 's indication of a rally failed. Some might argue that the sample size of the observations is too less to conclude the range shift phenomenon to be any good in the above case. If you're one of those people then I advise you check out the older data of the stock and you will see the answer for yourself. There are more hits than misses.

The misses (indicated by the red arrow on the chart) have very distinct characteristic to themselves. Everytime the RSI has breached the level 60 soon after breaching the oversold level of 30 deeply, has lead to a failed rally. Basically, range shift works both ways. If you have RSI racing past 60 after a sluggish move where it held its nose above 30, then that gives a good indication of an impending rally, but the same move after a deep dive below the level of 30 just indicates shortness of breath and a bad (failed) rally.

To add to the above observation, the stock has also successfully made a higher high and a higher low which indicates uptrend. It is currently resting at the kissing point of the 35 and 50EMA. A crossover of the 50EMA above the 35EMA would make me more comfortable with this upmove.

If you look very closely, there has been alot of volume activity near the bottom of the chart just before the higher highs and higher lows came into the picture (literally). This for me is an indication of accumulation by big cats (the guys who knows the whats and whens before everyone else).

The stock also resisted the 100EMA (blue line) is the last rally so naturally moving above this level would be a confirmation of the rally and trend change.

I am expecting a 100% rally in this super cyclical stock post confirmation. Also, a breach of the previous low (59.70) is an exit for me.

As a disclaimer, this isn't a stock recommendation but a mere observation of a great phenomenon unfolding on the chart.
Another disclaimer: I am long on Balrampur Chini.
A warning: Anyone investing in Balrampur Chini based on this article is doing so at their own risk. Please be responsible.

The above observation is purely technical. Anyone with a fundamental insight on Balrampur Chini is invited to share the same, we can put up a collaborated article ( no pay for that :p).
I will myself try to come out with some fundamental insights (only if I get the time, no promises). You can reach me at kchamaria1993@gmail.com for the analysis of other stocks (NSE, NYSE, LSE as long as there is a chart), commodities or currencies, I will try my best to respond.

Until next time, Adios! :D

Footnote : The article was published before rally witnessed in Balrampur Chini today. It close 5% above yesterday's closing.