There is a time to avoid the stock and there is time to buy the stock. One of the advantages of following Price Action - It tells you when to follow/buy and when to avoid the stock.
Case Study: SBI
Once Upon a time, not long ago - this was the state of State Bank of India stock. It was down and out in Feb 2016. The stock was on the verge of a major breakdown.
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
Yes this is how the chart looked back then -
Was stock a compelling buy then? - No....No way. I am not trying to fit in a pattern here. Triple Bottom yeah woh Bottom. Fundamental stinked at that time. No way the stock was a buy.
Then Something happened?
But when Govt is the biggest shareholder, then what's there to fear- SBI got that dose of good news post-Budget on March 01 2016.
This is what SBI stock did
It did a Gap-up opening in March 2016 and then filled the gap by May 2016. The turnaround opportunity came in May 2016
It was a classic rally of 70% in six months. People ask - how do we know stocks have bottomed out. SBI stock in 2016 is a beautiful illustration of that. It was quite a co-incidence that SBI stock hit a resistance and demonetization happened and SBI stock sold off again.
2017 - A New Beginning for Market and SBI
SBI stock because of 2016 price action became a buy on declines. Demonetization phase acted as a setback but once the market bottomed - the stock offered another opportunity at 240-245. I covered it on Jan 05 2017
Here's what SBI stock did
SBI stock did rally from 245 to 310 and formed a double top around that level. It was a nice 30% rally but not great considering overall market. With slowdown noise, and NPA concerns, SBI stock once again came down to 245 levels - the place from where it took off in Jan. It was a very disappointing trade.
But again you cannot bet against Govt. Just when stock was right there at the support - like last time - Govt announced another measure - and SBI stock just took off and resulted in massive price adjustment. Unfortunately, this time following prices gave only clue and hope when stock was at 240 but I doubt there was anything to buy at 240 this time.
What can we learn from the above?
1. Never short a stock untill there is conclusive breakdown. There was no breakdown in SBI stock -not in Feb 2016 and not in 2017.
2. Never discount a big news flow that has the potential to change the trajectory of the stock. Fundamental Turnarounds lead to Technical turnarounds
3. Sometimes good things happen right when stock is at the Support level 🙂
Always remember: All it needs - small fundamental spark for a beaten down broken stock to make a grand comeback
Please do not mistake me. I am not writing this case study for: I told you so...but to reflect on how our thinking process should work and so that in future - this case study becomes a template for how you should approach such situations
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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