Science of Stock Price Action:
An underperforming stock needs a catalyst like solid earnings, big policy change, new product offering which can turn the sentiment around in a dramatic fashion. Once that happens, the stock responds by a Huge GAP UP in the Chart. In such cases – the Gap filling becomes a great entry point for traders and investors.
Case Study: SBI
SBI was down and out stock in Feb 2016
Thanks to reckless lending under super guidance of UPA Manmohan and Sonia – SBI trading at lows of CY 2009 pic.twitter.com/Mc2C5HheA3
— Deepak Singh (@smarket) February 22, 2016
But then SBI got the required dose of good news (small fundamental spark) post-Budget on March 01 2016.
How did SBI stock react? – A Huge Gap-up enthusiasm
There was a huge gap up post news day and then stock rallied for few days before coming down to the Gap support area in May. Just remember – all the enthusiasm of March vanished by then. But as it always happens – The Gap Fill level acted as great entry point and stock rallied 60% in following 6 months. That’s HUUGE for a large cap.
Source: Chartalert.com
This case study is an excellent example of how such opportunities should be traded and why one should never take eyes off such an opportunity
Lessons:
1. Never discount a big news flow that has a potential to change the trajectory of the stock. Fundamental Turnarounds lead to Technical turnarounds
2. Gaps offer great entry opportunity during pullbacks especially when stocks pull back to fill those gaps.
3. When a big fundamental turnaround happens in a sector, follow other stocks of the same sector
A Big move in Punjab National Bank PNB
Source: Chartalert.com
As you can see in the chart above, PNB stock was a down and out stock before Budget day in 2016. It also rallied from 70 to 90 on budget proposal with a small gap only to come down later to fill the gap and even succumb below it. Tech Analysis is not exact science. You have to take everything into consideration – market, sector. PNB stock formed double bottom and took support around levels of 70. SBI filled the gap and formed doji on May 24. PNB stock too formed a doji and double bottom on May 24. Both stocks took off from this level. Just see the chart below of PNB
Source: Chartalert.com
Since, PNB was more down and out stock. It rallied more than SBI to make up for it. In the end, PNB stock almost doubled in following few months.
That’s how a big fundamental Turnaround plays out. In market, there is no guarantee. Some sectors show lots of signs but fail but some make a big move. The idea is to ride the big gains and manage the losses by exiting early on disappointments. In 2016, PSU Bank turnaround worked very well.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers