Science of Stock Price Action:
When stocks rally a lot, then tend to trade sideways to consolidate the gains and let the moving averages and fundamental catch-up with the stock before they make another decisive move
Let’s take few stocks as examples:
TCS
Source: Chartalert.com
As you can see in the chart above – TCS stock has been trading sideways between 2100 and 2800 for two years now. This is what happens after a stock makes a big move. TCS stock rallied from 700 levels to 2800 between 2010 and 2014. Hence, a consolidation after a 4x move is reasonable.
ITC
Source: Chartalert.com
As you can see in the chart above – ITC stock has been trading between 180 and 260 for three years now. ITC also had a huge run between 2009 and 2013 and hence now consolidating gains.
Aurobindo Pharma
Source: Chartalert.com
As you can see in the chart above: Aurobindo Pharma made a huge move in 2014-2015 during which it rallied from 100 to 900. Now, since last year and a half – it seems the stock is consolidating between 590 and 890. Right now, the stock is pulling back and one can expect a decline to 590 levels.
Lupin
Source: Chartalert.com
Lupin has delivered a stunning move over last 6-7 years from levels of 120 to 2000. But now stock seems to be building a base at 1300-1400 levels.
What does this all mean? – Time Correction
When stock prices rally exponentially in short period of time – then they undergo long period of underperformance (time correction) which allows fundamentals to catch up with prices. Time Correction can be very painful for Long-term Buy and Hold Investors. The stock after trading sideways can either rally again or succumb too and end the bull run. It all depends on fundamental factors
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