In the last article, we had begun analyzing the chart of Infosys
from a low, using the different techniques that we have seen so far. We
had come to a stage where we had exited the long trade as the stock had
shown several signs of having recorded a high. While the immediate
reaction to this may be that one already knows the subsequent price
action, one would like to point out that every decision is being taken
on the evidence as it emerges and there is nothing which is done with a
view that events will unfold in a manner that is already known. Readers
are referred to the earlier write up for details. We carry on this part
of the trade examination from where we left off last time.
Take a look at the chart below
The
first marking shows where we were last time. The prices rallied from
the old reliable support of 38% retracement and went to on record a
lower top and then broke through the first low to signal another, more
significant lower top and lower bottom. This was further confirmation
of the stock’s intent to decline. We now add a down trendline to the
stock and look for a rally back from point A to sell into. The rally
halts at point B, which did not reach the trendline and therefore our
sell signal is not triggered. It drifts downward once again. We are now
alert for a fresh break of the swing low at point A which would then
set up a continued decline to either the 50% or 62% retracement levels.
Since this affords sufficient room to profit, one can take the short
trade. So one can sell if the low at point A breaks.
It is
seen that at point C, the stock breaks the former low but finds support
exactly on the 50% retracement line and then commences on another
rally. While this is positive, one would be cautious about any buying
because of the earlier bearish signals. At point D the stock manages to
exceed the resistance trendline and that is a warning that trend has
once again changed. The rise from there is quite powerful and continues
to carry the prices past the former swing high at point E. We miss the
entire move because we are caught in a bearish mindset. Ideally, one
should be into the stock in a flash when it breaks past D or definitely
past E. But conservative trading is what we are attempting here and
therefore no trades will be taken until we are sure.
The
prices pull back to the trendline at point F affording a fresh buy
opportunity. Should we take it? No. Note that the candle as the
trendline is approached is a long black and that the close is below the
trendline. We have also continued the 12-24 averages and find that the
prices have broken both the averages – a fresh sign of weakness. At
point G, the averages show a negative crossover also. Hence we draw a
horizontal line at E (the former resistance now changed to support) and
await a decline to around that level as a fresh buy signal.
As
an aside, one may note the circled area near the top where there are
two small bodied-long shadow candle patterns. One is a hammer and the
other a shooting star. This combination is called “Dynamite Shadows” by
this author (this pattern is not found in the books by Steve Nison but
I have seen it happening frequently enough in our markets to warrant a
pattern labeling). This often produces a good reversal in the short
term especially when preceded by a decent upmove. It turned out that we
did not get a good entry point at any time immediately and the stock
moved up further and into a consolidation thereafter. We missed a good
deal of the move unfortunately.
Now that quite some time has
passed, it would be useful to take a look at the weekly chart. Here we
find a very smooth passage for the stock during its initial rise – an
almost undisturbed short-term moving average! The horizontal line is
where we were waiting to buy (on the daily chart earlier). No
opportunity came by until the prices dipped again, coming now come to
rest on the long term moving average. Also note that the distance
between the two averages has reduced sharply. This now presents a good
opportunity. When we go down to the daily charts again, we find that
the prices are still under the two averages. We now need to wait for a
good buying opportunity
It
takes a few weeks before the buy is in. In the chart alongside the hand
symbol shows where the signal emerged on the weekly chart. Note
subsequently the morning doji start pattern to form the bottom, which
was then tested three times (the third being near the resistance
trendline). By then the averages had intertwined and just beyond the
trendline, they are on the verge of turning positive also. One more
point is to be borne in mind here. Multiple retests of the low with
every one of them forming higher bottoms when succeeded by an upside
breakout usually leads to a powerful move. Such a move is getting set
up here. These are subtle signals from the chart and such points should
be kept in mind when trading and analyzing.
As
expected, the market takes off and moves quite sharply up, improving
prices from around 625 levels when the signal was given to a high of
1750 before reaction sets in. It can be seen in the chart that a simple
average system would have sufficed to track this market. Note on the
chart that the moving average gave a second additional buy signal when
the prices backtracked into the short term moving average and then took
off again. The prices chugged along until around 1625 levels when they
declined to break the short term moving average. One could book full or
partial profits here, since substantial amounts are on offer. Or,
around 1525, the long term moving average was also broken. This was
followed up a few days later with the averages showing a negative
crossover. So the position created earlier could have been sold off
here for a decent profit.
The key here is to work up the
courage to hold the position through profitable times. This is the area
where most people fail. It can be seen that the tool is faultless. In
this case, a complete no-brainer like a moving average managed to give
on substantial profits. But it is debatable how many people would have
been hold on to such gains and not exited in the small reactions. Goes
to prove that we are the ones who make the errors and not the system. A
person who can stick with the rules of the system will come out a
winner. |