Science of Stock Price Action: Technical Turnaround above Moving Average Resistance
Technical Turnaround: When an underperforming stock does nothing for a long long time, creates a well-defined resistance and then suddenly makes a move past that resistance, it captures the attention of traders and smart money. The move is called Technical Turnaround and pullback to the previous resistance becomes the NEW Support and a Buying Opportunity.
When an underperforming stock breaks out above well defined moving average resistance – it can either deliver stunning returns in no time or can lead to complete disappointment by going nowhere.
Case Study 1: HCC Turnaround
I covered the stock on July 06 2016 as the turnaround happened. Here’s a video that I put out back then –
Here’s the Video
Please watch in Full Screen Mode
How the stock performed post Turnaround? The Picture says it all
Source: Chartalert.com
As you can see in the chart above – HCC turned around above 250 week moving average by making a large candle move on 05th July 2016. It then turned sideways and pulled back to retest that moving average over next 1.5 months before finally surging almost 80-90% in less than few weeks.
Case Study 2: Aban Offshore
Source: Chartalert.com
As you can see in the chart above – Aban Offshore was struggling below 100 dma for long time. Aban then managed a large candle move indicating a Turnaround. The Pullback to 100 dma became the buying opportunity which worked at around 190 levels.
Source: Chartalert.com
But instead of 100 dma, HCC found another level to bounce i.e. 190 and did not rally vertically.
Source: Chartalert.com
All turnaround moves do not deliver mega success and sometimes turnarounds can be little tricky.
Case Study 3: Vedanta
Source: Chartalert.com
The Chart is self explanatory.
The Checklist – How to Look for Turnaround Plays
1. Look for an underperforming stock which is stalling at a particular resistance preferably moving average or Horizontal support Line. The moving average can be 50 dma/100 dma/200 dma/xyz ma
2. Wait for stock to move past that well-defined resistance with decent volumes
3. Buy on Pullback to the previous resistance and place a 5% stop loss below it and wait for following 3-6 months for stronger returns. Exit if stock sinks below the prev resistance
The Turnarounds do fail too and hence it’s important to keep an eye on the turnaround levels.
Example: JSW Energy Turnaround above 150 dma
Source: Chartalert.com
As you can see on the chart above: JSW Energy after a huge underperformance below 150 dma made a big candle move and then did its best to hold 150 dma as support. There was real turnaround in the making but stock succumbed to selling pressure and turnaround failed.
Source: Chartalert.com
The patterns can fail and hence one is better off taking a loss and moving on. There is no such thing as guarantee in the market. After a successful HCC – there was a disastrous Punj Lloyd turnaround
Source: Chartalert.com
Taking a loss on breakdown is as important as riding the gains. Now remember – taking a small loss and riding big gains is the strategy. See how GNFC did
GNFC stock – Gap up turnaround above 200 dma and then on every pullback to 200 dma – bounced back with intensity. I shared this chart back then when the opportunity developed
Source: Chartalert.com
What happened?
Source: Chartalert.com
I hope you found the above chapter useful.
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