It is the direction that matters. Once you get that right, good things happen over a period of time. All you have to do is show some patience and keep riding.

The market has predictable long-term trends and cycles but gives no guarantees in the short term. Anything can happen at any time. Always approach trading with a plan. And ideally, trade in the direction of the wind.

Direction of the wind

When a stock breaks out above a critical resistance, then good things happen over a period of time as long as the stock holds critical support levels and the structure of the market is intact.

Case Study: Bajaj Auto

Bajaj Auto stock did a big gap move on 27th January 2023 but the enthusiasm did not last long due to bad market conditions, electrification concerns on Bajaj Auto sales, and bad export performance. The stock peaked at 3940-3990 levels and then sold off to 3650 levels. The Gap up enthusiasm faded 🙁

Trading Rule: When a stock refuses to do follow-through moves, then the high becomes the resistance level to watch

Then, everything changed on April 03 2023

Bajaj Auto stock in a surprising move broke past the resistance of 3960 on this news, The stock became an automatic buy

Clean chart

Observations

1. The stock broke out and rallied to 4900+ i.e. 22% in 3 months (Point 1 to Point 2)
2. The stock then built a base at 4600. That’s what breakout stocks do. They rally and then form a base for subsequent rallies. They wait for some moving average to converge. Bajaj Auto stock finally kissed 100 dma and slowly trended upwards
3. Bajaj Auto stock has finally taken off from 4600 to now 5472 (i.e. up 19% in 2.5 months)

As you can see in the chart above, Bajaj Auto stock did all the right things post breakout and over the following 6.5 months, the stock is up 36%.

Source: Chartalert.com

Learn Science of Stock Price Action

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. I only cover 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