Focus on what the stock is doing, and not what it should be doing.
When a stock breaks out to a new high, then good things happen. Bajaj Auto stock is a classic textbook example.
Bajaj Auto Price Action between Nov 2019 and March 2023
As you can see in the weekly chart above,
- Point 1: Bajaj Auto stock collapsed to 2000 levels with the market due to covid in April 2020.
- Point 2: The stock then recovered with the market to precovid highs of 3200 and then broke past it by Nov 2020.
- Point 3: The stock did a breakout rally of 28% from 3200 to 4300 by Feb 2021. It formed a double-top
- Point 4: The stock then by the end of 2021 declined to 3200 and retested it twice by March 2022.
- Point 5: The stock then traded in a range between 3200 and 4050 a new resistance
As you can see in the chart above, once the stock formed a double top, there was no trend at play and the price action was all random and rangebound between 3200 and 4050. There was no case to trade the stock.
Bajaj Auto stock formed a low with the market by the end of March 2023 and then broke past 4050 and 4300 by April 2023. The breakout above 4050 made the stock a compelling buy in April 2023.
A perfect case of Breakout and Trend Acceleration
When stocks break out, then magic happens. Bajaj Auto stock first broke out and then pulled back to build a base at 100 dma. The stock then launched itself and never looked back with 20 dma as the support. Now the stock is trading at 8600. Yes from 4300 in April 2023 to now at 8600 in March 2024.
Source: Chartalert.com
Learn the Science of Stock Price Action
Fundamentals don’t drive stock prices.
How people perceive those fundamentals drives stock prices.
As a market participant/trader, keep an eye on how the market views the fundamentals than being obsessed with your own version of fundamentals. It means looking at the price action and it tells you without bias what the market thinks about the stock. Once you read the price action, go and find the reason why the market has such a view on the stock, and be aligned with it.
This is the level one mind training every individual requires to be in sync with market thinking. This is the real fundamental of Investing. I call it the Science of Stock Price Action
If price action fascinates you – then Science of Stock Price Action is a great place to start. I only cover the Indian stock market here.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purposes. 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
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