Technical analysis - Adani group.

The best way to make money from stocks is to completely ignore the news and focus only on price action and volume.

While it is a common fallacy to think that if any person or news channel confidently recommends a stock, people automatically think that it must be a good stock.

if you are buying stocks based on the recommendations of influencers and news people, you are not investing or trading; you are gambling.

Not one person in history has beaten mutual fund returns by buying stocks based on news and influencer recommendations.

But but... How can one have sold shares of Adani before the report against him became public? Well, most of the Adani stocks were in a downtrend for a few months. You could have sold them easily without relying on any news. 

Here's the technical analysis of the Adani Group.

1. Adani enterprises. (ADANIENT)

Buy point B1, Reason-

• Took major support over previous high 1.
• Notice that on all pullbacks, the 10day ma has worked as support (purple line). all pullbacks to this area were buyable. any shorting attempts during this rally are low odds and have small targets. 

support is the area where demand for that price is more than supply, thats why most of the time we see bounce in price of share when its near its support area.

Sell point S1, Reason-

• It closed below the rising 10-day moving average, which was earlier acting as a major support but now became resistance.

resistance is the area where demand for that share for particular price is lesser than its supply. thus we see more fall in share price when its near its resistance area.

• Estimated profit - 30%. even after considering 2 days being late to identify trend on both buy and sell occasions.
• Holding period required for this trade- 2 months.

Buy point B2 , reason

• While the daily chart did not provide a clean setup for an entry after the fall, an interesting pattern did form, providing a very nice consolidation above the 10-day moving average during October.
• One can take entry here with a target of previous high 2.

Sell point S2, reason

we did not sell near previous high 2 and waited for more because resistance line created by previous high 2 was broken very easily in the next trading session and it gave a very good consolidation over previous high 2.

• It was in uptrend from june,22 showing proper strength as trendline (grey) was acted as a major support.
• You can see beauty of chart when trendline (grey) was broken and previous high 2 which was acted as support earlier has now become resistance which was tested several times before further fall.
• Estimated profit from this trade- 10%. even after considering 2 days being late to identify trend on both buy and sell occasions.
• Holding period required - 1 month.

2. Adani green. (ADANIGREEN)

Buy point - B1, Reason -

• During Dec 21,took major support over previous high 1.
• Been in an uptrend for a while in a series of higher high higher lows. (grey line).
• Was consolidating over previous high 1.
• Resistance lines of previous high 1 were acted as a major support now.

Higher highs and higher lows indicate that an uptrend is occurring with the overall increase in the value of the instrument, while lower highs and lower lows can be seen in downtrends and show a decrease in value.

Sell point - S1, Reason,

• Broke the support line near 2710 which now acted as a resistance after a retest.
• Estimated profit- 65%, even after considering 2 days being late to identify trend on both buy and sell occasions.
• Holding period required - 5 months.

Avoid buying immediately after a breakout or selling immediately after a breakdown; one must wait for a retest to confirm an uptrend or downtrend.

Buy point -B2 , Reason,

• Resumed trading over trendline after a false breakout. (grey line) 

False breakdown cannot be avoided, generally one should sell only after retest. breakouts and breakdowns works beautifully only after succesfull retest.

Sell point -S2, Reason, 

• after upward continuation, the price acted to resistance and started falling, further it broke down below major trend line (grey) which was acted as a support since Nov,Dec 21. the same trend line is now acting as a resistance now.
• You can clearly see that a retest was attempted to see whether the same trendline is resistance now, which justifies the end of an uptrend.
• Another reason to sell at a point S2 was price did not manage to hold above previous high 2.
• Estimated profit - a minor percentage of profit or breakeven situation.

3.Adani power. (ADANIPOWER)

Buy point- B1 , reason-

• Proper breakout over previous high 1 with a retest to see if previous resistance is now acting as support.

Sell point- S1, reason-

• A beautiful bullish trendline (gray), followed by higher highs and lower lows, was paused, with confirmation given by a retest.
• Estimated profit- 40%, even after considering 2 days being late to identify trend on both buy and sell occasions.
• Holding period required- 3 months.

after that, on daily chart, stock was in downtrend since Aug 22 in a series of lower high lower lows as trendline (grey) acted as a major resistance.

4. Adani transmission. (ADANITRANS)

Buy point - B1,

• Broke the resistance area and started consolidating over previous high.

Sell point- S2,

• Broke the trendline (grey) which was indicating uptrend since jun,22 in a series of higher highs And higher lows.
• Even after a retest it failed to stay above trendline (grey) which indicates a pause in current uptrend. 
• Holding period required - 2months.
• Estimated profit - 15%,  even after considering 2 days being late to identify trend on both buy and sell occasions.

5. Adani total gas. (ATGL)

Buy point - B1,

• Broke the resistance area and started consolidating over previous high.

Sell point- S2,

• Didnt managed to hold above previous high during retest.
• One should no longer expect new highs. First, it did not manage to hold above the resistance area, and the second last pullback came all the way down to major support.
• We do not know this for sure, but the chart is telling us that, based on the odds, it is unlikely to make new highs.in the same fluid manner as we have in the past.
• Holding period required - 4 months.
• Estimated profit - 25%,  even after considering 2 days being late to identify trend on both buy and sell occasions.

6.Adani wilmar. (AWL)

Buy point - B1,

• Gave us a proper breakout over a trendline (grey).

Sell point- S2,

• Started forming lower highs lower lows pattern. (A bearish pattern).
• Also failed to hold major support Near rs.640 area.
• Holding period required - 3 months.
• Estimated profit - 40%, even after considering 2 days being late to identify trend on both buy and sell occasions.
• On daily chart, stock is in downtrend since Oct 22,in a series of lower high lower lows as trendline (grey) acted as a major resistance.

7. Adani ports. (ADANIPORTS)

• Points B1 and B2 are buys, while points S1 and S2 are sells. As you can see, there were many swing opportunities present.
• Estimated profit - 30-35%.

A quick read: What is liquidity, and how does it affect stock prices?

Liquidity is the availability of cash in the economy. it can be driven by multiple factors.

 
If the central bank is printing money and keeping interest rates low, there will be more cash in the economy, and vice versa.

The interest rate is a percentage charged by the lender on the borrower’s debt repayment or reward for saving money at the bank.

There is an inverse relationship between interest rates and liquidity.

Here's how liquidity affects stock prices: Stock prices are slaves to demand and supply.

I. If demand for a stock is greater than supply, its price will shoot up. This is because more people want to buy the shares, so they will have to compete among each other by offering higher and higher prices.

2. If supply for a stock is greater than demand, the stock price will collapse. This is because if very few people want to buy a share but a lot of people want to get rid of it (sell it), the sellers will have to compete among each other by offering lower prices to the buyers.

Now, how does liquidity affect demand and supply?

Higher liquidity in the economy means people have a lot of money in hand. 

The spending of this money will lead to economic growth, but this money will also be invested in the stock market, thereby increasing the prices of stocks. whereas lower liquidity in the economy means people do not have money to spend, let alone invest. So the demand for shares goes down. Instead, they might sell their investments to meet their basic needs, thereby driving up supply for the shares. This is why, following the economic shock, markets around the world soared.

This is why markets across the globe shot up post-COVID because of the availability of excess liquidity offered by low interest rates.

We saw bear markets globally when central banks started raising rates all over the world to fight inflation. Excess liquidity is the exact reason why all cryptocurrencies gave mind-boggling returns in 2020–21 and have been down 70–80% ever since the FED announced they were going to raise rates.

                                                                                                                  (Pic courtsey- Investopedia)

 

                                                                                                                                 

3.Simple analysis that surprisingly few market participants understand.

Here's a quick analysis that surprisingly few market participants understand. 

Assume you start with a capital of 10 lakhs in Year o and earn a return of 100% per year for the next ten years. You'd have a whopping 102.3 crores at the end of Year 10. 

That is the power of compounding, but hold on a second ;( However, in year 11, you become overconfident and incur a 100% loss. You end up with nothing. Nothing. "You lose everything you've earned over the last ten years." 

The whole point of investing is to figure out how to avoid losing everything. As a result, risk management becomes critical. 

"Remember, you can make a thousand % profit or even more, but you can only lose 100%."

Most people believe that in order to succeed in the stock market, one must be skilled at analysing stocks and selecting the best ones. 

However, few realise that this skill is secondary. 

RISK MANAGEMENT is the most important skill for success in the stock market.  

Here is an important tip. Before purchasing a stock, check all social media platforms to see if everyone is talking about it. At that point, it's probably not a good buy. 

You can actually avoid losing 100% by following a few simple rules.

1. Never invest in stocks during a stage 4 downtrend. Regardless of how strong the fundamentals are.

( Link - Stage analysis )

2. Always cut your losses while they are still manageable. losses work exponentially against you.

A 10% loss can be recovered by making an 11% profit, but a 50% loss requires a 100% profit, A 70% loss will require a 233% profit to be recovered.

3. Avoid bear markets.
While most people are unable to understand bear markets due to a recency and confirmation bias, bear markets can be brutal.
Many stocks that fall during a bear market never recover to their previous highs.
And bear markets can go on for longer than most people expect and can cause losses larger than most people can afford.
The safest bet is to avoid bear markets.

Think of it this way -
if you see a speeding bus headed your way. What will you do?
Will you move out of the way?
Or
Will you stand there and hope the driver will press the brakes?
And retail keeps buying falling stocks from promoters and institutions because of the cliche of "buy low, sell high."

There is a common misconception among retail investors and even some "value investors" who have read only one axiom and now call themselves value investors.

The misconception is that stocks that create a new 52-week low are good buys. This is the second-worst mistake after averaging down a falling stock.

Just to clarify, I am not implying that all stocks that create a new 52-week low are going to zero. But stocks making new 52-week lows are weak stocks that are witnessing institutional selling. Money is not made by buying weak stocks that are being sold by institutions, but by buying strong stocks that are being accumulated by institutions.

With these closing thoughts, here is wishing you all the very best!

In the next blog, we will understand the most important factor of any financial market: liquidity.

2. Fundamental Analysis or Technical Analysis?

When buying, I rely 80% on technicals and 20% on fundamentals (future, not historical).
During the selling process, 100% of the technical.
Here's how it works:

• Fundamentals will tell you which stock has the potential to become a big winner.
• The technicals will tell you when to buy that great stock.
• The technicals will tell you when the big guys are selling and you should get out as well.

We use the term "investor" for the fundamentalist and the term "trader" for the technician.
This is a reflection of the longer-term outlook you must have when using fundamentals.
Due to the many changes in the market, we believe that the concept of "buy and hold" is no longer valid.
There are several reasons, but consider the following:

• Years ago, the major companies were more industrial.
• They had big plants with big start-up costs.
• No one could become a competitor to General Motors overnight. It took huge resources.

Today, many of the biggest companies are in high tech, producing computers, related devices, and software.
This technology changes quickly, and almost anyone can enter the field with a good idea and some creativity.
It is the concept that two kids in a garage can bring a company to its knees!

Was there money to be made by Internet companies in the 1990s? There were stocks that literally went from one dollar to hundreds!!

In some cases,
They did this on no earnings, no earnings predictions for next year, and on borrowed money.
No fundamentalist could justify purchases in most of these. Yet technicians had a field day.

Even if you do believe that fundamentals should figure into the equation, how do you handle the realisation that we really don't know what the fundamentals are?

• Companies can twist things any way they like. What information can you believe?
• The only real-time news occurs in a closed office, when the accountant tells the CEO that they are in trouble. Everything after that is old news. By the time the appropriate people in the company are told, memos are typed, plans are made, and families and friends are told.
• After that, a press release is put together, damage control people are brought in, and, well, you get the idea.

       pic courtesy- Tradingqna

                                                                                                Source- TOI.                                                                                                                                                            

Despite popular belief to the contrary, it is the technical trader who has less risk than the fundamental investor.
In all things, we can be more certain of what will happen tomorrow than we can of what will happen next year.

• Technical traders sell losing positions as part of their philosophy.
• Fundamental investors hold the belief that all is well until the fundamentals that were the basis for their entry change.

It brings up an interesting question that many fundamentalists have a hard time answering.

• Just when do you enter a stock based on fundamentals?
• When do you take a profit?
• When do you cut your losses and move on?

The answers to these questions are usually random numbers, or they simply do not exist.
One thing that limits fundamental analysis is subjectivity!
All fundamental analysis is extremely subjective and influenced by the biases of the analyst.
Let's look at an example.

If you hold HDFC Bank shares, you want the results to be positive.
As a result, you will focus on the positive aspects of the outcome while dismissing the negative aspects as unimportant.

Similarly, if you have just sold HDFC Bank or hold a short position, you would automatically focus on the negatives and ignore the positives as immaterial.

However, stock charts, on the other hand, are far less subjective.
Stock charts are like an ECG.
Just like a doctor reads your ECG to monitor your heart's health, similarly, a technical analyst checks stock charts to monitor the health of a stock.

One misconception is that charts can only help intraday and short-term traders.

Nothing could be farther from the truth.
Instead, charts work better on larger timeframes and can be used to manage risk, time entries and exits, and pick stocks.
While the stock names are always new, new technologies keep emerging to analyse the charts, but the patterns are always the same.

Stock prices are driven by human greed, hope, and fear, and these things haven't changed since the times of the Ramayana and Mahabharata.
Technical analysis is one of the most misunderstood concepts in the world.
99% of people think that technical analysis involves drawing lines on charts and memorising patterns.

It does not.
Technical analysis is the study of the demand and supply forces behind the price movements of an asset, which helps in identifying:

• What stock should I buy?
• When should I buy it?
• When should I sell it?
• When not to do anything

So you got the idea why technical analysis has an edge. 

In an upcoming chapter, we will talk about very simple analysis that surprisingly few market participants understand.

                                                                                                                                                      The study materials required to elaborate on this topic are

• Oliver L. Velez's book, Strategies for Profiting in Every Trade.
• Momentum Investing Co.
• Zerodha Varsity.