The market has been range bound for past one month. This kind of situation brings lot of confusion in human mind about the next market action. We invariably tend to choose path of least resistance. That is, if the market is up for long time then it has to go down.
Market is not like that. Market is a process to find correct value of an asset. The correct value is found when there is a balance of sellers and buyers. I find lot of stocks today in this condition. Some people are selling and equally same people are buying hence the price remains in a tight range. This tight range of stock movement is called base.
Sobha Developers
Sobha Developers is a classic example of stocks building base and then making a move. In this case the stock is moving higher after each base. The major move in the stock will come as soon as it moves out of the base.
Base is a perfect balance of buyers and sellers so the price does not change. As soon as some sellers come out to sell there are equal buyers waiting so the price does not fall. It’s very clear that mutual fund owners are the primary buyers in this case. If more buyers show up than sellers, the stock will move higher and keep moving until the next base is formed. Opposite will happen in the bear market conditions. Current market condition only suggest move higher from the base.
Patel Engineering building base
Patel Engineering stock came out of base building in Apr 2009. I count it as base 0. We cannot catch all the base breakouts. Generally when the overall market is not moving higher, the base building process starts. While investors are waiting to find some reason to move higher the base is in process.
Most of the retail investors like us get crushed during this base building phase. Look at the range of the new base of Patel Engineering. It starts from 350 and goes up to 450. If you enter at 450 and exit at 375, you know what happens. This is where your knowledge of market analysis plays role.
We do not know when to enter, and on the top of it, you don’t even know when to exit.
Best Entry point is when the stock moves out of its base. You should be buying the same day when the stock moves away from the base.
Important aspect of trading is about when you will exit your trade. I believe it should be when the stock moves below the base. In case of Patel Engineers your stop loss would be at 380.
I keep writing about stop loss in all my trades but never mention the profit target. That might be confusing. Each trade we make we carry the potential of loss, so it should be limited. You must clearly know when market proves you wrong, you must sell your stock and move to side lines.
As far as booking profit is up to you. 10-20% profit should be good to book or move your stop loss up so that when stock decides to move down you will get your hard earned profit.
As Warren Buffet Says, Investing has only two rules
Never loose money
Don’t forget rule 1
There are plenty of stocks in base building right now, that is kind of signal that when market moves up, all these guys will be running along with the market.
Allied Digital Services – Just ready to move higher
Buy Allied Digital Services with a Stop loss at 340. It has all the characteristics of winning stock.
Happy Independence Day
Wish you good luck towards your financial independence
Thanks
Anil
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