Fundamental Analysts read Balance Sheet/Annual Reports/Industry reports to find out whether a stock is investment-worthy or not but those reports never tell you what the collective wisdom thinks about the stock. Here’s how one can read the price action of a stock. Let me take Bandhan Bank as an example.
Reading Bandhan Bank Price Action
Source: Chartalert.com
Bandhan Bank stock stalled at 200 dma in Dec-Jan 2020 and sold off to 430 levels, before cracking below it. The stock came back to 430 levels and then sold off again dramatically [covid sell off] to 180 levels. [1-2-3-4]
Dead Cat Bounce: The market bottomed and every stock rallied with the market and so did Bandhan Bank to 280 levels and stalled there [4-5]
Breakaway above Dead Cat Bounce – The stock moved past 260 and rallied to 200 dma [resistance]. It became a stock breaking one barrier to stall at another barrier. The stock sold off back to 260 by Sep end, the time when cyclical stocks bottomed out. [6-7-8]
Breakaway Base and turnaround rally – The stock took off from 260, rallied to 200 dma, and then broke past it – the real turnaround – and then it rallied to the next barrier of 430. [8-9-10-11].
Resistance cools of the stock: Bandhan Bank sold off from 430 back to 200 dma and the stock seems to be holding it for now. The turnaround is in progress as the stock heals. The real momentum in the stock will come only above 430. [11-12]
Final Thoughts:
Did I recommend this stock over the last six-nine months? Nope.
Bandhan Bank stock has not exhibited any inherent strength and momentum so far. It was a broken stock as it traded below 200 dma. Now, the stock is trying to heal as it builds a turnaround base at 200 dma. Most of the time, the stock has broken one barrier to get stalled at another barrier. The price strength basically comes from a strong market, and not from the stock fundamentals perse. The stock has rarely outperformed the sector or the market so far.
What the stock can do? – If the turnaround is for real, then someday, the stock can take off from 200 dma of 330-340 and break past 440. It all depends on the market conditions. Having said that, this is not the best stock to play in this sector.
Fundamentals don’t drive stock prices.
How people perceive those fundamentals drive 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 look 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 Science of Stock Price Action
If price action fascinates you – then Science of Stock Price Action is a great place to start.
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