Your Secret To Making 6% - 20% Profits... In Weeks!

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A Special Guide

- By Apurva Sheth

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TABLE OF CONTENTS

1. Preface 2

2. Section 1: Getting started with Technicals 5

What moves the markets? 6

Fundamentals & Technicals: The Best of both worlds 9

The 3 Basic Components of Technical Analysis 11

Basic Elements of Charting 15

The secret to choosing the perfect chart time frame 20

This common charting error can cost you dearly 26

3. Section 2: Trend Analysis

What’s your view on the markets? 29

Your ‘Stepping Stone’ in Technicals 31

A good start is half the battle 35

4. Section 3: Supports & Resistances

Feeling Let Down By the Technical Analysis Calls on TV? Read this… 41

Where to expect Supports & Resistances? 46

Trading Range Bound stocks 51

Reduce. Reuse. Recycle 56

5. Section 4: How I delivered 6% to 20% returns… 61

6. Conclusion 66

© Equitymaster Agora Research Private Limited 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: 91-22-6143 4055. Fax: 91-22-2202 8550. Email: mailto:support@dailyprofithunter.com Website: https://www.dailyprofithunter.com/. CIN:U74999MH2007PTC175407 Image Source: Shai_Halud/shutterstock.com Disclaimer Equitymaster Agora Research Private Ltd (Equitymaster) is the owner of the copyright in this Guide. The readers are requested to note that this Guide is only meant for personal use of the Subscribers of Equitymaster. Any act of copying, reproducing or distributing this Guide whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. This Guide is for information purposes and is not providing any professional/investment advice through it and Equitymaster disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this Guide, including without limitation the implied warranties of merchantability and fitness for a particular purpose. Information contained in this Guide is believed to be reliable but Equitymaster does not warrant its completeness or accuracy. Equitymaster will not be responsible for any loss or liability incurred by the user as a consequence of his taking any investment decisions based on the contents of this Guide. Use of this Guide is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary.

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PREFACE

Hi, I am Apurva Sheth.

I would like to congratulate you on taking your first step towards learning the art and science of

short-term trading in stocks.

I am confident that this is going to be an extremely knowledgeable and profitable journey for you.

By joining me today and reading this guide, I believe that you have already taken the most critical

step of your journey… i.e. understanding the immense money-making potential that lies in this

investing approach and willingness to spend some time and effort to learn the tricks of trade.

Over the course of this guide, you will learn the basics of technical analysis, charting, and even

understand why a particular stock price moves in one direction rather than the other… amongst

other things.

My goal will be to equip you with all the tools and techniques that professional traders utilize to

book quick profits from the stock market so that you could book regular profits across all market

conditions too.

Yes, irrespective of what you might’ve heard, I strongly believe technical analysis is one of the most

lucrative investment strategies out there!

And as you have decided to join me on this journey, I take it as my responsibility to teach you

everything that I have learned over the years.

I’ve already done all the work for you and have distilled all the knowledge into this guide in a simple

and easy to understand language.

So, do go through each and every word of this guide and I’m confident that you can become a

better, more knowledgeable and independent trader.

And here’s what I promise…

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If you read through this guide in detail and learn all the techniques I’ll be sharing with you in the

next few pages, I see absolutely no reason why you can’t book 6% - 20% profits in a matter of

weeks…

Regularly!

Okay, now I understand that’s a high claim and you might doubt on whether you can achieve that

yourself…

But trust me when I say that it takes just a few minutes every week to become an independent and

wealthy trader.

I have personally done it before and now I’m going to share everything with you!

Of course, we’re going to have ups and downs… but rest assured I’m here to guide you every step

of the way!

Why me?

Okay, this is a tough task without sounding pompous…

But it needs to be done.

So, as you must know by now, I am a certified Chartered Market Technician and a member of

Market Technician Association (USA).

I have previously guided professionals at banks, mutual funds, insurance companies and even

foreign institutional investors (FIIs) make quick profits from the stock market by following the exact

same strategy I’m revealing to you today.

And the only reason I’m doing this is because I want you and other professional traders to be on a

level playing field when it comes to booking short term trading profits.

If you’re willing to put in some effort from your end to learn this investment approach, I can almost

guarantee that this will be the most lucrative investment strategy you could’ve ever seen.

So, without further adieu and with all my best wishes for a wealthy trading future…

Let’s Begin!

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Section 1 - Getting started with Technicals

Most retail traders lose money in the markets, that’s not the end of it. They keep on losing money

in the markets. And that’s what worries me the most.

Despite consistently losing money they still continue to trade in the same way they used to do

earlier - trading based on tips, rumors, HOS (Heard on the Street) messages forwarded by their

friends on Watsapp groups.

I don’t want to mention those annoying calls/SMS from shady sources ‘Guarantying’ sure shot

returns. Many of you might well have fallen prey to such services. You may have lost your hard

earned money to such tricksters as well.

But despite all this why didn’t you ever think of using a scientific approach that has been proven for

years. Mind you this approach that I am talking about is not a latest fad or something but it’s a

proven, tried and tested methodology which has been validated by various studies done over the

years.

So let me begin with a question….

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What Moves The Markets?

It might seem very basic but let me tell you where all learning comes from – by asking basic

questions.

So, what do you think moves the markets?

Why do the stock prices change so frequently when nothing appears to have changed on the

ground?

Why does the price change every second, every minute and every day?

You must be considering answers like quarterly results sales, better profits, product launch, PE or

PB multiple, etc. as your reasons for this movement. But do you think that’s always the case?

Often we see stock prices move lower even after so-called ‘good results’, or see it moving up

despite ‘bad results’. How does one justify such movements?

Are there any universal laws which can help us determine whether the prices of any financial

security will rise or fall?

Well, we do have two principles that can guide us in this aspect.

1. More buyers than sellers at a given price, and

2. More enthusiasm amongst buyers than sellers

Any product, service, commodity, currency, or security that satisfies these two conditions will see

its price rise.

I think it’s pretty simple and none of us would doubt or question the validity of these principles.

But, how do we know whether there are more buyers than sellers and measure the extent of their

enthusiasm?

A simple way to find this out is to ASK & OBSERVE.

Have you ever noticed how things happen when someone is buying groceries? A transaction begins

as follows:

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Lady: What is the price of this vegetable?

Shopkeeper: Rs X

Lady: Rs X is too much, I will pay only Rs 0.8 X.

Shopkeeper: Rs 0.8X doesn’t work for me…You can check around with what others are offering and

come back if you want it at Rs 0.95X.

Depending on the demand-supply situation the lady either accepts the offer or rejects it. In case of

rejection the lady moves to another shop owner and repeats the same process until she gets the

price she wants or agrees to pay the price that is asked for by the shop owners.

Observing this transaction gives us lot of insight about which side is more enthusiastic about buying

or selling the goods respectively.

This gives us further indication on the direction in which prices are likely to move.

But this is possible only if buyers and sellers are limited in number. We cannot of course ask each

and every participant or observe every transaction that takes place in financial markets.

Then what could be the ideal solution to this problem when tracking equities or any other asset

class?

One could consider End of Day (EOD) prices when all ‘fighting’ has stopped.

EOD prices are the best estimate, as traders agree upon that price before taking an overnight

position.

However, how does one record, remember and analyse so much of price data that is generated

day-in day-out across markets.

And that’s where charts come into the picture.

Drawing price charts is easier and more informative than simply writing or recording numbers.

Charts show things that numbers cannot like patterns, trends, change in trends, and seasonality.

For example the Nifty chart attached below shows three trends that prevailed after topping out in

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January 2008 i.e. downtrend till October 2008, sideways till March 2009 and uptrend till November

2010.

Nifty Price Chart showing 3 clear trends

Source: Spider Software India

The old Chinese proverb ‘a picture is worth a thousand words’ is best suited to describe usefulness

of charts.

All throughout this guide I will show you how charts can add a different dimension to our trading

and investment analysis. I will make sure that it is less tedious and passively even more profitable

to learn and earn along with charts.

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Fundamentals & Technicals: The Best of both worlds

Prices are determined more by the attitude of market participants to the emerging fundamentals

than by fundamentals themselves.

Now let us break this statement down for better understanding.

“Prices” - refers to the price of all financial securities like equities, bonds, currencies and

commodities

“are determined more by” - will be affected ‘more’ by (and not only by)

”the attitude of market participants” - market participants refers to everyone who is ‘in the market’

buying or selling securities at a given moment, plus everyone who is not in the market but might be

if conditions were right. This means the stock market is potentially anyone with personal savings.

All price movements in stock markets is attributed to these people’s attitude. And that is a result of

their collective emotions and psychology. Two primal human emotions which rule the financial

markets are fear at one extreme and greed at the other.

“to the emerging fundamentals than by fundamentals themselves” - people’s perception of the

fundamentals supersedes the actual fundamentals.

Many misinterpret this and think that fundamentals of a stock are not important for the price.

No! That’s not the case. Fundamentals will always remain important for the stock. But that is not

what a technician is bothered about.

Fundamentals are the cause and price movement is its effect.

Technicians believe that the effect is more important than the cause, and so devote more of their

time studying price action over other things.

We have already seen that there can be numerous factors affecting stock prices. And ascertaining

the extent of their net impact on stock prices would be very difficult for an individual investor. So it

makes sense for you to devote some energy to study price action.

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I often see my friends or colleagues getting into an argument over which one is a better approach

while making money from stocks fundamentals or technicals.

I think the whole argument here is flawed.

It should be Fundamentals and Technicals rather than Fundamentals v/s Technicals.

Why should we accept one and reject other. When we can have the best of both.

A marriage of both will work wonders. In fact, I believe in combining both and bringing the best of

both worlds together.

One strategy which I follow during the quarterly results season is keep a track of stocks that are

coming out with good numbers. Once the initial frenzy is over, these stocks normally consolidate

for a while. I look out for opportunities when such a stock in “consolidation” phase could breakout.

This approach enables me to get into a fundamentally strong stock at the right moment.

Any approach which may tell you with a high degree of confidence about the likely future of the

market shouldn’t be neglected. And technicals definitely help you with that.

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The 3 Basic Components of Technical Analysis

“Our youth now love luxury. They have bad manners, contempt for authority; they show disrespect

for their elders and love chatter in place of exercise; they no longer rise when elders enter the

room; they contradict their parents, chatter before company; gobble up their food and tyrannize

their teachers.”

I am sure each one of you must have come across similar lines at one point or other.

Those of you who have grown-up children may have said the same things to them. Our

grandparents may have similar opinion about today’s generation. But have you ever wondered

when this statement was first recorded?

Any guesses on the year?

No, it’s not today… and not even 20 years back. You have to go back very far away in history to

trace it. It is 2,400 years ago that the great philosopher Socrates (469 BC–399 BC) made this

statement.

Amazed, perplexed, bemused, shocked?

I’m sure you are.

But that’s the way it is. Human nature and emotions remain the same irrespective of the era one is

in.

People were greedy and fearful even a hundred years back as much as they are now.

These emotions have ruled mankind ever since the first human walked on this earth and will remain

so until the last person alive. People always tend to react in a similar fashion. It is this similarity that

leads to the formation of identifiable price patterns over and over again.

Technicians have developed descriptions of emotional patterns that are reflected in price action

that tends to repeat over time. (If this weren’t true, all technical analysts and charting service

providers would have been out of business long back.)

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If I were to sum up this aspect, “history repeats itself” is what comes to my mind. It is the first basic

premise of Technical Analysis.

Second is "market action discounts everything".

This means anything that can possibly affect the price fundamentally, politically, psychologically, or

otherwise - is actually reflected in the current price. A study of price action reflects all the shifts in

supply and demand. If demand exceeds supply, prices should rise. If supply exceeds demand, prices

should fall. This action is the basis of all economic and fundamental forecasting.

A technician then turns this statement around to arrive at a conclusion that if prices are rising, for

whatever specific reasons, demand must exceed supply and fundamentals must be bullish. If prices

fall, then fundamentals must be bearish.

The third premise is that “prices move in trends”. The whole purpose of charting price action is to

identify trends in early stages of their development for the purpose of trading in the direction of

those trends. A trend once established will continue in the same direction until it reverses.

Now having understood the basic premise of Technical Analysis, let me just show you in a simplistic

format what it is comprised of. The picture below shows three subjects that combine to form

Technical Analysis.

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Components of Technical Analysis

It’s an easy trick to tell whether you would like Technical Analysis or not.

If you liked all the three fields at school or college then you would like Technical Analysis as well.

But don’t worry if you were bad at any of these. I was bad in geometry at school but still fared well

at Technical Analysis (in our journey I will tell you all about my successes and, more importantly,

failures). You can also develop a liking for the subject if you are willing to learn.

The most important component of all is Psychology. It strives to find answers to why people feel,

think and act the way they do.

I had explained how a simple transaction of buying groceries takes place earlier. We know that the

degree by which buyers and sellers decide to raise or lower their prices, directly affects the

transaction price. Wouldn't it be a plus if we could tell which side is in a better position to hold

command over the prices? Such an observation would reveal a lot about the anticipated price

shifts. And that’s what we are concerned about in Technical Analysis.

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The process of plotting trendlines, identifying chart patterns and naming them such as rectangles

and triangles draws the link between technical analysis and geometry.

A technical indicator is actually a mathematical formula that is first computed and then plotted on

a chart. Moving Averages are the simplest form of indicators which are derived mathematically.

Other methods like projecting targets from a pattern, computing Fibonacci projections and

retracements are all form of mathematical calculations.

I think by now you must be clear how all three are inter-related and how they apply to TA.

Now that you have thoroughly understood the philosophy behind technical analysis, I’m sure all of

you are keen to see how it actually works.

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Basic Elements of Charting

I am sure that you have thoroughly understood the basic philosophy behind technical analysis.

You may be excited to learn more about charts and start trading with the new found knowledge

that you have gained. But, let me tell you that I have made far more mistakes than anyone else out

of excitement and burnt my fingers. And I don’t want you to go through the same pain that I have

been through.

So, instead of jumping straight to techniques of trading I will first speak to you about chart

construction. To those who are new to this field a basic understanding of chart construction will

give you a solid foundation before moving on to higher concepts. For those who are familiar with

charting, spending a few minutes to brush up your basics is not a bad deal, huh?

We start right from the basics. The 2 basic elements that you will find on a technical analyst’s chart

are: price and volume.

Layout of a Basic Chart

Source: Spider Software India

This is what a basic technical chart looks like. It is ideally divided in two parts.

The upper part is where (1) price data is plotted while the lower half is where (2) indicator is

plotted.

(4) Price Value

(5) Indicator Value

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In most cases you will find volume plotted below the price.

On the top left corner of the chart you will find the (3) name of the ticker alongside other details

like open, high, low, close and % change compared to the previous period.

The (4) price and (5) indicator values are plotted on the Y axis placed on the right hand side.

The (6) Indicator name is visible on the left hand side below the ticker in a new panel.

The (7) date or time are plotted on the X axis.

Also note that the (8) time frame that is chosen for charting price is mentioned at the bottom of the

chart alongside X axis in the rightmost corner.

Dly for daily, Wkl for weekly, Mon for monthly.

I hope that was clear. I know it seems like a lot of variables, but once you get a hang of these

indicators they will seem as familiar as an old friend.

Now, let me walk you through the various types of charts that are commonly available, and tell you

which one is my favourite.

1. Line Chart

These are the first charts that we come across in our geometry class at school. They are created

by plotting the closing prices of the period selected. For example, on a daily time frame a line

will be plotted between the daily closing prices to create a line chart. On a weekly time frame

weekly closing prices will be used, on monthly time frame monthly closing prices will be used

and so on.

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Nifty Line Chart Since March 2014

Source: Spider Software India

2. Bar Chart

They are also known as OHLC charts. OHLC stands for Open High Low Close respectively. Bar

charts show the range of the timeframe selected. For example, on a daily chart every single bar

will show that day’s range right from high to low.

Bar charts are normally plotted in black & white but some people, like me, prefer red and green.

However, I have rarely used bar charts in my career and prefer candlestick charts over them as

these are visually appealing and easier to read.

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Nifty Bar Chart Since March 2014

Source: Spider Software India

3. Candlestick Chart

Japanese rice traders have been using this technique for ages and the western world discovered

this technique later in the eighties. Candlesticks are easier to interpret. It gives the same open

high low close data that bar charts give but in a much more appealing format.

Let’s look at how a candle is formed.

The adjoining figure shows a green bullish candle. It means the closing price is

above the opening price on the time frame selected. Mind you, a bullish candle

can form even on a day when prices have fallen compared to previous day. The

nature of the candle (bullish or bearish) is decided based on today’s close with

respect to today’s open and not today’s close with respect to yesterday’s close.

Source: wikipedia

The adjoining figure shows a red bearish candle. It means the closing price is

below the opening price on the time frame selected. A bearish candle can form

even on a day when prices have risen compared to previous day. For example: -

A bearish candle would form even when the stock may have opened gap up

today and closed below today’s open but above the previous day’s close. In this

Source: wikipedia

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case the stock has registered gains on a day-on-day basis but the nature of the candle will be

considered bearish as it closed below its open.

Nifty Candlestick Chart Since March 2014

Source: Spider Software India

This is a candlestick chart of Nifty since March 2014. You can see that it looks nicer than the

other two I have shown above.

It is also easier to read. Notice the election results day gap up in Nifty when the index opened at

7,270, moved up to the high of 7,563, but ended the day at 7,203. This was a gain of 80 points

compared to the previous day’s close of 7,123. But, the daily candle was still marked as red in

color because the close is below the open.

Apart from this the candle chart also give details about the day’s range which a line chart cannot as

it considers only closing prices for plotting. The bar chart adds more depth and value compared to a

line chart but the focus is only on the day’s range rather than the open and close.

Thus, for me candlestick charts are clear-cut winners when compared to the other two.

Election results day gap up

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The Secret To Choosing The Perfect Chart Time Frame

I’ve explained to you the basic elements of chart construction. I hope now that when you see a

chart you immediately see the different parts of it and are able to read its basic information.

Now, charts can be constructed based on different time-frames.

I myself use a few different time-frames when I create charts, and today I will show you some of

these.

Let’s start with lowest time frame charts.

1. Intraday Chart

This chart is used to plot price movements during a trading session. It would consist of all

the data points between a market opening and closing.

Intraday charts give you a detailed picture for the day’s movement. These charts can be

used to view a single day’s movement from session opening to closing or many days

intraday movement from opening to closing.

For example, I may want to see the price movement on the index for an important day like

the RBI Policy or may want to see the last fortnight’s intraday charts leading up to the event.

The most commonly used time frame on an intraday chart is 1 hour, also known as an

hourly chart.

Depending on your trading style and preference you can have charts as low as tick charts

which is a chart that plots price every second.

For the time being just have a look at the chart below. It’s a 60 min chart of Nifty since 17th

October 2014. The data between the dotted vertical lines represents one day’s trading

activity.

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60 Min Nifty Chart Since 17 Oct 2014

Source: Spider Software India

2. Daily Chart

A day represents a complete cycle of events in our lives right from sunrise to sunset. We

wake up every morning, perform our duties during the day and retire from all the chores in

the night and the cycle moves on. We live our lives in parts and a day is the best

representation of such parts.

An advantage of looking at daily charts is that it makes your trading less emotional as it adds

only one new piece of information every day. So you can sit back and take a prudent

decision without worrying for tracking price change every minute. I have personally

observed and learned that focusing on daily charts helps you avoid two biggest mistakes a

common trader does i.e. overtrading and overanalyzing.

Most market observers including fundamental analysts, financial media etc. gauge prices on

a day-to-day basis. Even the NAV of a mutual fund is calculated on a day-to-day basis.

Psychologically, daily price movements is what affects the most to anyone in the financial

markets.

The charts that you saw earlier were all daily charts. I also prefer daily price charts over all

other time frames.

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Nifty Daily Candlestick Chart Since March 2014

Source: Spider Software India

3. Weekly Chart

Weekly charts plot a whole week’s price data. So a weekly candle opening price would be

Monday’s open, and close would be Friday’s closing level. The highest and lowest that the

stock or index may have travelled during the whole week will become the high and low for

the weekly candle.

The chart that I have attached below is a weekly chart and it shows data for the same period

that the daily chart posted above shows. You must have noticed that the number of candles

have reduced in the weekly chart and it is also less sensitive to price movements compared

to the daily chart. That’s because it combines 5 days data points into 1 week. This helps

focus more on the trend rather than its sensitivity.

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Nifty Weekly Candlestick Chart Since March 2014

Source: Spider Software India

4. Monthly Chart

Monthly charts are prepared using the same principles that are used for preparation of

weekly charts. The opening price of the first trading day of a month’s open is considered as

the opening level for month.

And the last trading day’s close is considered as closing level for the month. These charts are

mostly used by investors with a longer horizon. There are charts even higher than monthly

time frame ones like quarterly, half-yearly and yearly but unless your investment horizon

matches Warren Buffett’s you don’t need to look at these.

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Nifty Monthly Candlestick Chart Since March 2009

Source: Spider Software India

Ideal Chart Timeframes based on market participation

I have told you about the various time frames that can be used. Now let me tell you how I go about

choosing an ideal timeframe for my analysis. The table below will help you determine an ideal time

frame to choose for your analysis depending on the category of market participant you fall into.

Market Participant Time in Position Expected Returns in % per trade

Chart used for

Trend Determination Entry & Exit Points

Long term investor Months to years 30% and higher Monthly Weekly

Intermediate term trader Weeks to months 12%-30% Weekly Daily

Swing trader 3-20 days 6% - 20% Daily Hourly

Day trader Hours 0.5% - 2% Hourly 10 minute

Micro trader Seconds to minutes A few pips 5 minute 1 minute

Most people normally fall into the category of swing trader or intermediate trader. I have spent

most of my career in recommending ideas to these two group of market participants, and if you are

into this kind of trading, then this is the perfect platform for you!

Okay, so let’s assume you are a swing trader interested in trading ideas that generate returns of

anywhere between 6-20% in a period of 3-20 days.

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The chart that you should pick up for your analysis or trend determination is a daily chart. All your

trading decisions should be based on this chart alone. The chart you pick up for trend

determination will become your ‘Chart of Choice’ (CoC). Now once you are convinced that the

stock you have chosen is worth your hard-earned money…

‘STOP’

Don’t be in a hurry to place an order with your broker. Just hold on to your excitement and put your

phone back where you picked it up from.

Now once you are settled just jot down your points/arguments for entering the stock.

Once you are done with it, just check one degree higher time frame chart above your ‘CoC’ to

CONFIRM whether this chart also reinforces the same view you had about the stock when you

analyzed it on your ‘CoC’.

In this case we will check the weekly chart of the stock and confirm our views on a higher time

frame.

If it doesn’t confirm, then it’s not the best of things to go ahead with this stock.

On the other hand, If you are convinced that the stock is worth your money, just hold on to your

breath and check a lower degree time frame chart for best entry opportunity.

A lower degree chart in this case would be an intraday chart.

My favorite timeframe on an intraday chart is 75 minutes.

The 75 minute timeframe chart divides our market hours which start from 9.15 am to 3.30 pm (375

minutes) into exactly 5 equal-sized candles. This helps me get a better picture for the day and

score over the hourly candles, which breaks unequally at the end.

In case I want to move further down on the timeframe, I choose a 25 min candle which divides 75

min into 3 equal parts or a 15 min candle which divides 75 min into 5 equal parts.

Check for a best entry opportunity on intraday charts and then finally place an order with your

broker, who will be eager to buy at the market rate but you would stay firm with your price levels

and not get influenced with his sweet talk.

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This Common Charting Error Can Cost You Dearly

You know that date/time is plotted on the horizontal axis and price is plotted on the vertical axis.

Date/Time axis is a straight forward concept, but there is a nuance attached to the price axis which

most people ignore i.e. scaling techniques to plot price.

Sometime back in our geometry class we have learned about the two most common types of price

scales.

1. Linear Scale

Each unit change is represented by the same vertical distance on the chart, regardless of

what price level the stock/index is at when the change occurs. It plots the price movements

in absolute terms. It shows the same distance between equal price differences.

For example: Let’s say a stock priced at 10 Rs. moves up by 10 Rs. and the same stock which

is later priced at 100 Rs. moves up by another 10 Rs. In both the cases the stock has gained

by 10 Rs. only but in the first instance it’s a 100% move and in the second one it’s only a 10%

move. Despite these big differences the chart will be marked up by an equal distance in

both the cases.

2. Logarithmic Scale

Each percentage change is represented by the same vertical distance on the scale,

regardless of what the price of the stock/index is when the change occurs. It plots the price

movements in percentage terms. It shows the same distance between equal percentage

differences and not at equal prices.

For example: Taking the same example that I gave earlier let’s say the stock priced at 10 Rs.

moves up by 10 Rs. and the same stock which is later priced at 100 Rs. moves up by another

10 Rs. In the first instance it’s a 100% move and so the distance marked up on the chart will

be 10 times larger than in the second one where it’s only a 10% move. Unlike linear scale

both the differences will be marked differentially on the charts.

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Now, I will show you how this actually works on a chart. And how you can avoid misinterpretations.

I have attached a linear scale chart of Nifty right from 1994. Just check the price scale carefully. All

throughout this scale price are equidistant from each other. A move from 1,000 to 1,500 is marked

equally as a move from 2,500 to 3,000, when in percentage terms they are a lot different.

NIFTY Line Chart On A Linear Scale Since 1994

Source: Spider Software India

The following chart is a Log scale chart of Nifty from 1994. Take note that here prices are at unequal

distance because they are plotted based on percentage change rather than absolute change. Also

notice the period from 1994 to 2003 in both the charts. On linear scale it looks like market is

consolidating in a narrow range when in reality it had actually gone through lot of volatility. The

‘Dotcom Boom’ saw Nifty move from a low of 800 in December 1998 to a high of 1,800 in February

2000. That is more than double in a matter of 15 months! This rally is hardly visible in the linear

chart. I have marked this period in a rectangular box on the log chart.

A linear chart can be somewhat deceptive at times. A 1,000 point move is much more significant to

an investor if the index is at 800. Than if the index is at 8,000. The deception can rise multifold in

case of stocks who have rallied more than 4 or 5 times in a short span of time.

Have a look at most rally in Nifty beginning in February 2014 from 6,300 to 8,600. On linear chart

this looks like a rocket launched into the stratosphere while on the log chart it is much more

gradual.

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NIFTY Line chart on a Log scale since 1994

Source: Spider Software India

Many a times in official gatherings I face a common question, “which scale do you use?”

And my vote has always been for log scale. A linear scale is useful only when the price range on

your screen is not more than 10%. In any cases higher than this it is always preferable to use a log

scale.

Log scale facilitates direct comparison of high and low priced stocks. And makes it easier to choose

the one offering greater percentage profits on the capital employed.

By default I always have a log scale on my screen. When I am on a smaller time frame a log scale or

a linear scale won’t make much of a difference. And when on a higher time frame log scale serves

the purpose of showing the correct picture. So for me log is always better than linear.

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Section 2 - Trend Determining Techniques

What’s Your View On The Markets?

Are you bullish or bearish right now?

Seriously?

Think about it for a second. Knowing what you know now, with which camp would you side - the

bulls or the bears?

I hate to say it, but if you answered bullish, you’re wrong. If you answered bearish, you’re wrong

too.

Now I am sure you must be perplexed to hear this reply from my side. But it’s a fact that most of

the people forget to ask a counter question. They hastily reply to this question depending on their

views and bias.

The counter question one should ask is that “What time span are you speaking about?”

Eureka!

I guess you have realized what I am talking about.

Like every person has his own tastes and preferences for food, music, hobbies etc. Similarly every

investor’s horizon of investment will differ based on his investment objectives, personal

preferences, risk appetite and the amount of time & capital he can devote to watching market

prices. One investor may be more concerned about the business cycle trend that occurs over

several years. Another investor may be more concerned about the trend over the next 1 year, while

a third investor may be concerned only for the intraday trend.

To answer a question like the one I raised above, it is very essential that both the people in the

conversation are on same page. Only then the discussion will be fruitful. Especially for the one

seeking advice.

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Quite often people make their investments based on advice given by experts on one of the blue

channels. The problem with following this advice is that there’s a vacuum between the expert and

advice seeker. In most of the cases both are operating with a different time span in mind.

Television is an excellent mode to disseminate information quickly but when it comes to giving

advice it fails miserably. One because it cannot cater to specific needs of such a large audience.

Second it has a time constraint. (They can’t allow you to speak more than a few seconds on a

question) Having been there and done that I know that anchors of business channels will want to

shove you either in the bull camp or bear camp. When sometimes it is more sensible to sit on the

sidelines and wait for more information/data. But then they can’t sit idle during this period. Their

advertisers won’t pay them if channels don’t come out with an interesting story every day.

I don’t blame the anchors for this but it’s the medium of communication that is at fault. Anyways in

either case the investor is at a loss.

When both these things are combined. Lack of clarity of the trend length and seeking general

advice from television channels. You end up confusing yourselves and eventually curse the expert

for his advice.

Now, let me offer a solution to these problems.

I will start with trend. A trend is a time measurement of the direction in price levels covering

different time spans. There are many trends. Three most widely used are primary, secondary and

minor.

(Charles Dow who developed the Dow Jones Industrial Averages is considered father of technical

analysis, classified trends into these 3 parts.)

He called primary trend as “the tide”, this is the trend that defines the long-term direction (1 year

to several years). Primary trend is the major underlying trend in the market.

Secondary or Intermediate Trend are “the waves”, this is medium term movements or departures

from the primary trend (weeks to months)

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Lastly minor or short trends are the “ripples”, they generally show nervousness with rapid up or

down swings. (1 week to 6 weeks). With the advent of computers intraday trends have also gained

massive fan following.

When you apply these principles to a standard 4 year business cycle you get a market cycle model

which is illustrated in the chart below. In this cycle a primary trend may last between 9 months to 2

years. Intermediate trend may last between 6 weeks to 9 months. And minor trend will last

between 2 weeks to 6 weeks. Mind you all stocks may not strictly follow this model but these are

general guidelines which one can apply while analysis.

The Market Cycle Model

Source: Profit Hunter

For an investor to grow his wealth safely and steadily it is very much essential to identify these

trends and changes in trends at an early stage and maintain their positions until the trend has

reversed.

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Your ‘Stepping Stone’ In Technicals

I started tracking the markets when I was in junior college. Television & newspapers were the only

source for me to track markets in those days. I relied most on expert advice that came on TV for

understanding markets. But over a period of time I realized that this advice didn’t make much sense

to me as I would not be able to practically put an advice to use.

The channels would play contradicting opinions of different experts at the same time and later on

when either one of their views was correct, they would re-run that same clip again and again.

The media also had favourite poster boys when markets were either in a bull or bear grip. These are

HNIs renowned for their views - one is a perennial bull and the other a die-hard bear. When the

markets had rallied quite a bit, either of the channels would run an interview of the bull. On the

other side when markets were in a downward spiral, the channels would do an interview of the

bear. Both of them may have made money in the markets but imitating them never helped me.

Next comes the analyst/s whom people would use as a contrary indicator. If he had a buy, people

would sell and vice-versa. I don’t know whether people actually did it but this is the joke that goes

around across different groups of people whom I have interacted with over the years.

I am pretty sure that you may have also had similar experiences in the past.

The only way out of this is to either do your own research or get access to research which is

unbiased & suits your style of investing.

I know that you are an action taker and that’s why you are reading this guide. Probably you are

amongst the one who want to do it all by yourself.

So here onwards I will shift from the ‘What’ aspect to the ‘How’ aspect of technicals.

So far I have told you about the philosophy behind technical analysis, the basic elements of charting

and about trends. These were the ‘What’ aspects now I will move on to the ‘How’ aspect and show

you how to use specific technical tools to your advantage.

First in this series is how to determine a trend.

Charles Dow derived the most basic and oldest method to determine a trend. We know that trends

move in 3 direction i.e. up, down and sideways.

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But how do we decide it objectively which of these 3 trends is currently active on a particular stock

or index.

Peak - Trough Analysis is the simplest of all tools available to determine the trend.

You know it very well that stock prices do not rise or fall in a straight line. Price moves are more or

less similar to a snake crawling in the sands leaving behind a trail similar to the one illustrated

below.

Peaks & Troughs

Source: Profit Hunter

The chart I have shown above is an example of a stock with rising peaks and troughs or simply put it

is forming a higher high and a higher low subsequently. These highs or lows can be separated from

each other by a few days, weeks or months. This is immaterial with respect to ongoing trend as long

as it is forming higher highs and higher lows the trend (up in this case) is considered as valid.

This principle applies similarly to a stock trending downwards. Here we will look for lower peaks

and lower troughs. The picture I have illustrated below shows both an uptrend as well as

downtrend based on peak trough analysis.

33

Peaks & Troughs Used To Determine Uptrend & Downtrend

Source: Profit Hunter

A stock can also move in neither of these direction and stay sideways. Here the peaks and troughs

will be at same levels or within the previous peaks or troughs. Some traders avoid trading when the

stock is sideways while some savvy traders will even trade within these ranges once they get a hang

of the levels from where price is likely to change direction.

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Peak Trough Analysis On Nifty Weekly Chart Since November 2010

Source: Spider Software India

I have illustrated above a peak trough analysis of Nifty on weekly charts for you to see. Do have a

look at it and try applying the same principle on a chart of a stock you hold.

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A Good Start Is Half The Battle

A good start is half the battle. These are lines from famous Greek philosopher Aristotle. This

proverb was spoken hundreds of years back but is still relevant and important today. The mistake

lies in the beginning, so an error at the beginning, though quite small, bears the same ratio to the

errors in the other parts.

Making a good beginning is important no matter what you are attempting: a new business, a new

job, a new home. If you get off on the wrong foot it can take a very long time to get back on track.

Making a good beginning gives you an edge, a confidence boost; it bodes well for the rest of your

venture.

Lord Ganesha is considered as the god of beginnings, the remover of obstacles. Traditionally, we

have always given prime importance to good beginnings which is why he is prayed across cultures

and religions throughout the length and breadth of India.

The reason why I am emphasizing so much on good beginnings is that even in technicals good

beginnings are equally important. Most of the times I see people who have just started with

technicals will start drawing random lines on charts. These are known as Trendlines.

A series of ascending bottoms in a rising market can be joined together by a straight line. These are

uptrend lines. And so can the tops of a descending series of rally peaks. These are downtrend lines.

Up & Down Trendlines

Source: Profit Hunter

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However, 99% of People Get This Wrong. Most newbie technicians begin by drawing trendlines

randomly on a chart and ultimately end up with wrong interpretations. If you remember lessons

from your geometry class, we need two points to draw a line. Same rule applies while drawing

trendlines. I often see people randomly drawing line that touches only one point. Then there are a

few other who use two points to draw a trendline. This method of drawing a trendline is correct but

their interpretation out of this isn’t as correct.

The general rule that I follow is that after drawing trendlines from two points the trendline should

touch and bounce back from a third point to be considered valid. This is a mistake which even

seasoned market veterans do when using technical analysis. They would rarely check the validity of

the trendline that they have drawn and expect the price to bounce off from the third point itself. It

may very well do so but expecting it always isn’t correct. The probability of price bouncing back

from fourth or fifth point is higher than a trendline which is just drawn with two points. So the

more the number of bottoms (uptrend) and tops (downtrend) formed near a trendline the more

important a trendline becomes.

Nifty Intraday 25 Min Chart Showing Valid & Invalid Trendlines

Source: Spider Software India

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In the chart illustrated above I have drawn an uptrend line from the low of 31st October 2014 to the

low of 20th November 2014. The trendline is drawn correctly with two points but its validity is not

confirmed until it touches a third point and bounces from there. So one should wait for the price

action to unfold itself instead of anticipating a bounce back when price starts trading closer to this

trendline. Prices could have bounced up again from this trendline however we would be banking

more on chance than on probabilities.

On the contrary have a look at down trendline that I have drawn from 5th December 2014 to 11th

December 2014. I would consider this as much more valid than the earlier one. Third point touched

this trendline on 12th December 2014 and confirmed the validity. After this point we can look up to

this trendline for valid signals. That’s exactly what it gave on 15th December 2014 as index reversed

twice after touching this trendline and resumed its downtrend. Eventually even this trendline was

broken as index rallied above it however it did its job and gave a correct signal.

Apart from this there are a few other concepts which I apply to judge the validity of a trendline. If a

trendline is held for a longer time without being penetrated by prices its significance/validity

increases. In the chart attached below I have drawn a down trendline from August 2008 peak to

October 2009 peak on DLF. It’s been more than 6 years and this trendline is still valid.

Down Trendline Drawn On DLF Weekly Chart Since August 2008

Source: Spider Software India

Another important factor is that the angle of ascent should not be too steep. Sometimes stocks go

through phases of exceptional rise at such times even valid trendlines are penetrated quite often by

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price. I have illustrated this below in the daily chart of JK Tyre. The stock has rallied 10 times in the

last 14 months. All the trendlines that I have drawn on the chart below are valid and have touched

more than 3 points but eventually all of them were penetrated by price. A sideways consolidation

followed after the rally but later on the stock resumed its uptrend. In such cases these trendlines

will have little forecasting value and may leave you frustrated for getting out of the stock too soon.

Uptrend Lines Drawn On Daily Chart Of JK Tyre Since September 2013

Source: Spider Software India

A trend line is a straight line that connects two or more price points and then extends into the

future from which the price may bounce back.

Trendlines are important tool in a technician’s toolbox and once you have learned the art of

drawing valid trendlines you can move on to ‘Trend Channels’.

A trend channel is nothing but price action contained between two parallel trendlines.

Uptrend lines are series of ascending bottoms in a rising market joined together by a straight line.

When you draw a line parallel to this uptrend line by connecting successive peaks you get a rising

channel.

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Downtrend lines are drawn by connecting tops of a descending series of rally peaks together by a

straight line. When you draw a line parallel to this line by connecting successive bottoms you get a

falling channel.

Rising And Falling Channel

Source: Profit Hunter

Now that you know drawing a trendline requires two points and validating it requires prices to

touch and bounce back from the third point on that trendline. This line then becomes our Main

Trendline. When you draw another line parallel to the main trendline off successive peaks (uptrend)

and successive bottoms (downtrend) you get a rising channel and falling channel respectively.

The chart illustrated above shows the same concept. As long as price advances and trades within

the green channel, the trend is considered bullish and till it remains in the red channel it is

considered bearish.

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Section 3 - Supports & Resistances

Feeling Let Down By The Technical Analysis Calls On

TV? Read This…

Imagine this. You are reading or listening to a technical ‘experts’ views on the markets or stocks

published in a newspaper or on a channel.

The interviewer asks, “What is your view on Nifty?”

The Technical Analyst (TA) expert replies, “If Nifty breaks the resistance level of 8,050 it can go up

to 8,200, 8,350 and if it breaks below the support level of 7,950 it can go down to 7,800, 7,700.”

“Seriously, you call that a view? Even a primary school student would have answered that. He has

read the number system and knows that 8,200, 8,350 follows after 8,000. You didn’t share any

‘expert’ opinion with me.”

You must be having similar thoughts when you read/listen such statements by experts. You may

have laughed away at the expert or maybe even at technical analysis altogether.

You may be right in rejecting the so-called expert opinion as it serves none of your purpose. But

neglecting technical analysis may not be a right choice.

I always see people taking commentaries on supports and resistance with a pinch of salt. And that’s

not their fault at all, because it’s the technical expert who wants to play it safe and give views from

both the sides. So that the next time he is asked for a view he can blow his own trumpet

irrespective of whichever side the market moves.

Most analyst do not take a bold view with the fear of being wrong.

Analysts practicing technicals will use supports and resistances as a hiding place. While

fundamental analysts tend to stick closer to the consensus estimates rather than making a bold

prediction and fear losing one’s reputation if things don’t turnout as expected.

In the midst of all this the one person who is always at a loss is you. You may start feeling cheated

and frustrated after losing your hard earned money to such advice. I have come across many

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people who have completely lost faith in any sort of research methodology be it fundamentals or

technical. They loosely claim that nothing works in markets. It is just gambling.

It is not the tool or methodology which is at fault but the way in which we use is what matters.

Before applying a particular method we should understand its application and limitations. It applies

to support and resistances as well. I feel they are one of the best tools that a trader as well as an

investor can use but due to the bad name it has got many people avoid using it.

Secondly people use them with half-baked knowledge and eventually end up with wrong

conclusions. But, I want to re-emphasize that these are the best tools and so I will be devoting

substantial time explaining these to you.

So let’s just start understanding what are supports and resistances and the psychology behind the

same.

So, what is a support?

Support is the price level at which demand is thought to be strong enough to prevent the price

from declining further. The logic dictates that as the price declines towards support and gets

cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time

the price reaches the support level, it is believed that demand will overcome supply and prevent

the price from falling below support.

And what is a resistance?

Resistance is the price level at which selling is thought to be strong enough to prevent the price

from rising further. The logic dictates that as the price advances towards resistance, sellers become

more inclined to sell and buyers become less inclined to buy. By the time the price reaches the

resistance level, it is believed that supply will overcome demand and prevent the price from rising

above resistance.

Let me explain this in detail with the help of an illustration.

42

How Supports & Resistances Are Formed

Source: Profit Hunter

The stock halts in the midst of a fall and jumps back to point A and moves back to point B. The

reason behind this fall can be anything. We are not concerned about that. All we are doing here is

simply ‘Observing’ that prices are moving lower.

At point A selling was strong enough to prevent any further advance while at Point B the demand

was strong enough which resulted to a pullback to point C. Now at point C buyers who had bought

at point B start booking profits while those who had bought at point A exit with no profit no loss.

This results in a supply zone getting created at the trendline drawn along the points A and C. This

becomes our resistance.

Now prices start tumbling again due to selling pressure from market participants pushing the prices

down to point D. People who had bought in at point B made a good gain when they sold at point C,

so when price reach similar levels again at point D they buy. There might be people who didn’t sell

at Point C after buying at Point B and may want to average at same levels. Thus interaction of all

these people push prices up again to a higher level. This results in to a demand zone getting created

at the trendline drawn along the points B and D. This becomes our support.

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As I said earlier market is made up of lots of participants and they may have different reason to act

to prices in the way they do. We should not bother about that, the fact that prices are moving and

reacting to certain levels is what is important for technician.

Previous Supports Now Become Resistances

Source: Profit Hunter

Now supports and resistances work wonderfully for a while as prices react perfectly to the supply

and demand zones until Point I. Prices fail to reach the previous resistance zone and reverses

direction earlier than expected and penetrate the support line BD. They move lower to Point K and

bounce back to Point L but couldn’t move any further up and move below the Point K (Dow Theory

Signal). The people who were enjoying buying at support levels (B, D, F & H) and exiting at higher

levels are now in a losing position for the first time. They may be worried a little. Some of them may

exit at Point L but many continue to hold their positions. They may panic once the stock moves

below Point K. And may stumble to exit their positions leading to a fall till point M. Fresh demand

emerges at Point M as people may see value in the stock (which is again very subjective) and

pushes the prices upwards. However, all through this there are many buyers who had entered at

Point B, D, F, H & J who are hoping and praying for the prices to come up to their buying level so

that they can exit at least with a no profit no loss. This makes Point N as a very strong resistance as

many sellers are waiting for their prices thus reinforcing the previous support level to a resistance

level now.

One key point to learn from this is that the reason why support and resistance levels work is

more psychological than fundamental. People remember their prices at which they buy or sell. This

price becomes their ’Anchor’ and they make their decisions based on this anchor.

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Another lesson to learn from this is that people who were enjoying trading within these range and

especially those who had entered at either of Points B, D, F, H & J are perplexed and are even

frustrated when they see prices breaking a support zone. They would doubt support and resistance

theory when prices would penetrate the support levels.

Let me tell you that support and resistance levels are like floors of a building. Having a floor at a

particular level does not mean that the elevator has to stop at each and every level. The elevator

can and does directly go from 20th Floor to 15th Floor. It may not stop anywhere in between. The

same principle applies to stock prices. This is the half-baked knowledge I referred to you earlier.

Most technicians fall into this trap even people following advice on support and resistance should

understand this thoroughly. No level is sacrosanct in markets. Like records, supports and resistance

are meant to be broken one day or other.

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Where To Expect Supports & Resistances?

Charts show a picture of changes in investor sentiment and emotions over a period of time.

Resistance zone are points where trader’s greed becomes excessive and turns to fear. Support zone

are points where trader’s fear becomes excessive and turns to Greed. Breakouts above a resistance

or below a support zone shows how and when the investor sentiment has changed. Large Volumes

along with breakouts show investor’s commitment in the direction of the breakout.

But, where do we expect support & resistance levels to form?

There are a couple of obvious places to look for supports & resistances. We will see this with a lot

of examples.

The simplest and most obvious points that become support or resistances are the previous highs

and lows. When some time has passed after a new high or low has occurred the emotional factors

starts affecting the market participants and general public at large.

I clearly remember 21st January 2008 when Sensex was already off by 10% from its recent high of

21,206. Market participants were anxious, they were expecting it to be just another normal

correction in a bull market. But what followed was awful, 10% lower circuits on the 21st and 22nd

January. The index was down by about 25% in a matter of few days. However, many investor’s

portfolio suffered even bigger drawdowns.

The index eventually managed to recover part of the losses in a few days but the damage was

already done. The high of 21,000 was now imprinted in their minds. The high of 21,000 was a hot

topic of discussion across social gatherings.

People started comparing their current portfolio value to the value when the index was at 21,000.

(which were poles apart) They started hoping, praying even begging for the index to reach to the

previous highs so that they can exit. Their portfolios were already battered but nobody knew what

was about to come next.

One thing was for sure that people were now deeply anchored to the level of 21,000 on the Sensex

(6,300 on the Nifty). These levels were like the peak of Mount Everest which every aspiring

mountaineer would look up and wish to conquer. However, these peaks remained as ultimate

46

challenge for the bulls for months and years to come. Mount 21K was eventually conquered after a

failed attempt in November 2010 and after lot of efforts in November 2013.

Sensex: Conquering Mount 21k...

Source: Spider Software India

The chart I have illustrated below is much before the 2008 top, it was in April 1992 when the

Harshad Mehta’s stock scam broke out and Sensex topped out at 4546. This level remained a strong

resistance for a long time. This level was challenged twice in September 1994 and in August 1997,

but bulls couldn’t drive it substantially higher.

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Sensex After The 1992 Scam

Source: Spider Software India

There are many more example like this. The best one of them is of Hindustan Unilever Ltd.

HUL Wakes Up From A Decade Long Slumber

Source: Spider Software India

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HUL was a star performer from 1995 to 2000. It was amongst one of the very few stocks to have

rallied 6 times during this period when the Sensex was going through a dull phase. HUL topped out

at 280 in July 1999. Six months later it hit a high of 323 and closed at 286 in February 2000. It tried

again in June 2000 but couldn’t close beyond the previous high and settled at 283. The stock had to

go through a 4 year long bear market and approximately another 2 years to come closer to the

previous highs. It closed at 289 in April 2006. Supply was strong enough to thwart it down. Every

other attempt met with selling pressure until June 2011 when the stock finally woke up from a

decade long slumber.

IOB: Support Down South...

Source: Spider Software India

Indian Overseas Bank Ltd. witnessed tremendous growth from 2001 to 2004. It rallied from 8 Rs. to

75 Rs. during this period. A correction followed soon halving the price to about 37 odd levels. The

stock resumed its uptrend and even crossed 200 levels by 2008. The trend reversed and pushed the

stock back to 37 levels by March 2009. The previous low acted as support and halted the fall.

49

From BSES To Rel Infra: Supports Remain The Same

Source: Spider Software India

Reliance Infrastructure took over BSES in 2002. It rallied four time from a low of 200 in October

2002 to a high of 800 in March 2004. It traded in a range until June 2006 when it broke below 400

levels. The stock soon boarded a superfast metro train and rallied more than 7 times within the

next 18 months. However, this train went out of control by January 2008 and crash landed to 350

levels by October 2008. All the correction that followed afterwards have ended in the range of 300

to 400. I selected this example to show that stocks do not necessarily reverse direction from the

exact support (or resistance) levels. Technical Analysis is not a perfect science. You have to allow

some flexibility in your analysis. The stocks/index will not reverse from exact levels but somewhere

near it. How much margin of safety you want will depend on what kind of a trader/investor you are.

It may not be easy for everyone to see the stock dropping from 400 to 300 which is a fall of 25%.

Given these limitations, supports and resistance levels can still give you valuable insights before you

decide to trade or invest.

50

Trading Range Bound Stocks

Emotions run pretty high when markets are at new high or low. We move from extreme euphoria

at new highs to extreme despondency at new lows. These emotions are so strong that the prices

get imprinted in the memories of market participants for a really long time.

Such highs or lows come only once in many years. There are other points as well which acts as

support and resistance more often on charts. These are points when prices are trading within a

relatively tight band/range. A trading range forms when a stock or index is consistently moving up

and down between two well-defined points for an extended period of time (days, to weeks, to

months). These trading ranges can form anywhere on a chart. Most of the time they would form in

the middle of a trend as consolidation while in other cases they may form at the end of a trend as

reversals. These points are easy to identify by simply observing price data. When a stock reverses

direction multiple times from similar levels (bottom of the range - Points BDFH) it becomes fairly

solid support. When a stock reverses direction from similar levels (top of the range - Points ACEG) it

becomes fairly solid resistance.

How Trading Ranges Are Formed?

Source: Profit Hunter

A range becomes stronger if either side of this range is held more no. of times. Once a trading range

is established one can buy at lower end of this range and sell at higher end of this range. Obviously

this is not as simple as it looks. While you may enjoy trading these ranges, sometimes the stock can

do the exact opposite of what you may expect it to do. You can be caught on the wrong foot. It may

also take a longer time to move from the lower end to the upper end of the range. Trading range

bound stocks takes a lot of patience. Those who are looking for quick profits may be disappointed

51

by the time it takes for the stock to move its full potential. Despite all this, trading range bound

stock can give consistent returns to traders. Investors who may have identified that their stock has

entered into a trading range can utilize it to their advantage by adding stock at lower end of this

range and selling at higher end of the range. They can continue to do so until the stock remains

range bound. By trading these ranges they can bring down their cost of the original investment.

Other savvy traders/investors who have knowledge of options can employ trading strategies

specifically designed to gain from such movements.

Now I will show you this with the help of a couple of real life examples.

ONGC: Stagnant from one election to another

Source: Spider Software India

ONGC is one of the best example of a range-bound stock. It closed with almost 30% gains in the

week when election results were announced in May 2009. Since then the stock entered in a broad

trading range from 240 to 340 and decisively moved out of it only 5 years later when 2014 Lok

Sabha election results were announced. (Only exception to this was in September 2010 when the

stock closed outside upper end of this range at around 360 levels for a couple of weeks)

On a close look one can observe that even within this broad range of 100 Rs. there are sub ranges

which can roughly be divided in to 50 Rs. The bottom of this range (green line) is 240 Rs. which has

acted as support throughout these 5 years. Middle band (orange line) of this range is 290 which

52

acted as resistance in the latter half of 2011 and whole of 2012. The top of this range (red line) is 50

Rs. above the middle band, at 340. The yellow line which marks the September 2010 top of 360.

After the recent election results the stock broke above the top of this range and hit a high of 470,

however it has failed to hold there and has once again reacted sharply down towards level of

around 340.

Reliance: Shattered Dreams

Source: Spider Software India

Many people have sentimental attachment to Reliance Industries. They have been holding it in

their portfolios for a long time. I have seen many families where this stock is handed over by one

generation to another. However, Reliance has shattered dreams of many of these families over the

last 5 years. It has also disappointed the institutions as all of them are holding Reliance in either of

their schemes. Reliance being a heavyweight is held in decent quantities across institutions. It has

consistently remained an underperformer when the markets have hit new highs.

It has been trading in a broad range of 1100-700 over the last 5 years. There has been some

instances when it has overshot these ranges (mostly on the higher side) during this period.

However, I have used levels which were respected most of the times and could easily be used while

making trading/investing decisions. Though the stock hit a high of 1267 on the back of election

results in May 2009, the most time that it has traded is within a range of 1100 to 900 from May

2009 to June 2011. Once the stock broke this range it traded in a new range of 700 to 900 from

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June 2011 to March 2014. This time again it overshot the 1100 mark and moved to a high of 1145.

However it didn’t sustain there for too long and slipped back to the middle band of the broad range

around 900 levels.

Hero Moto Corp: Breaking Out Of The Range

Source: Spider Software India

Hero Moto Corp traded in a range of 1,400 to 2,200 from May 2009 to May 2014. I have split this

range in two halves. The upper half ranges from 2,200 to 1,800. Lower half ranges from 1,800 to

1,400. It spent most of the time in the upper half of the range during this period. Eventually it did

breakout of this range and headed higher in a rising channel.

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South Indian Bank: Handsome Returns

Source: Spider Software India

I came across this chart of South Indian Bank in January 2014. You can clearly observe that it traded

religiously within a well-defined band of 20-29 since July 2010. Even within this band there were

sub-bands which acted as support and resistance at various occasions. One could have easily made

use of these bands to garner handsome returns on a consistent basis.

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Reduce. Reuse. Recycle.

I know you must be already startled after looking at this logo and title.

You are probably thinking, what this has got to do with technicals.

Rest Assured. I have aptly put it where it should be as today’s topic is very

much related to this.

But before I move on let’s talk about these three words. Reduce - is using

natural resources wisely, and using less than usual in order to avoid

waste. Reuse - is to use an item again after it has been used. Recycle - is a process to change waste

materials into new products to prevent waste of potentially useful materials. All of these three

components are equally important to eliminate waste and protect environment.

The component that we are going to talk about is Reuse. An item can be used again for the same

function or in a new-life form where it can used for a different function. The same concept applies

to trendline, supports and resistance.

I spoke to you about trendlines earlier in this guide. Basically there are two types of trendlines. An

uptrend line which can be drawn by joining series of ascending bottoms in a rising market by a

straight line. A downtrend line can be drawn by joining the tops of a descending series of rally

peaks.

International Recycling Symbol

Source: Wikipedia

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Trendlines As Supports And Resistance

Source: Profit Hunter

After drawing trendlines from two points the trendline should touch and bounce back from a third

point to be considered valid. When prices bounce back from fourth or fifth point of this trendline, it

is considered that the uptrend line is lending support or in case of downtrend line it is lending

resistance to price.

Using uptrend lines for support and downtrend line for resistance is like Re-using them again and

again for same function.

As it is bound to happen prices will breach these trendline one day or the other. When that

happens people generally discard these trendlines. I suggest we should apply the concept of reuse

in a new-life form for trendlines. The same trendlines which acted as supports may now act as

resistance and vice-versa. Thus the same trendline can be Re-used for a different function.

57

Same Trendlines Used For Different Function

Source: Profit Hunter

This concept applies equally on stocks that are trading in horizontal ranges as well. In technical

analysis terms this concept is known as ‘Change of Polarity Principle’.

58

Previous Supports Now Becomes Resistance

Source: Profit Hunter

Supports or Resistance lines drawn on stocks that are trading in a range are nothing but horizontal

trendlines. So, the same concept applies in both the cases. Previous supports can become

resistance and previous resistance can also become support.

Now I will show you how this concept can be applied in markets.

Cipla Ltd.

Source: Spider Software India

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Cipla Ltd. topped out just below 370 in December 2009, it revisited this level in December 2010 but

couldn’t cross it. It fell short once again in February 2012. By September 2012 it closed at a new

high but consolidated for a couple of months before making a meaningful move upwards.

After topping out in January 2013 at 435 it headed southwards, this fall halted around previous

resistance level of 370. This happened for four times in succession. The stock rebounded from same

level in June 2013, December 2013, February 2014 and May 2014 before breaking out above the

previous high of 450.

ACC Ltd.

Source: Spider Software India

ACC Ltd. hit a high of around 1,120 in November 2010. This level acted as resistance in April 2011.

It broke out above this resistance and touched a high of 1,230 in October 2011. The correction from

this top found support at 1,120 from November 2011 to January 2012. Subsequent corrections in

June 2012 and April 2013 also found support at 1,120. Also notice the trendline drawn at 950 levels

which acted as support from October 2010 to July 2011. The same trendline lent support later in

August 2013 and January 2014.

The stock hit a life time high of 1,545 in October 2012. The stock reversed direction from similar

levels a couple of times in September 2014.

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Lupin Ltd.

Source: Spider Software India

Lupin Ltd. is on a tear for quite a long time. I began by drawing a resistance line from February 2011

peak. This line acted as resistance until May 2013 when the stock closed above this line. Later on

the same trendline lent support during an uptrend. The stock found support at this trendline and

rebounded after witnessing corrections in August 2013, January 2014 & May 2014. I have drawn a

parallel lines above this trendline. The topmost line is from December 2010 high. And the lower one

is from January 2010 low.

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Section - 4

How I Delivered 6% To 20% Returns…

As promised in the beginning of this guide I will show you how I used various tools that I have

spoken to you so far to pick stocks that deliver solid gains of anywhere in between 6% to 20%

within weeks.

You might already know that I have been sharing my views on markets and stocks in the media

before I joined Profit Hunter. I would like to draw your attention to one such interaction I had with

the economictimes.com on the 11th July 2014.

Mr. Arun Jaitley was newly appointed as Finance Minister and had delivered his first Budget Speech

in the Modi Government. The guys at economictimes.com wanted me to share my top picks from a

medium term perspective after the budget. I shared best of my 5 stocks out of which 4 happened to

have hit their respective targets while one of them hit a stoploss. I would like to talk to you about

some of these stocks that helped me deliver returns anywhere in between 6% to 20%. In some

cases the returns were even higher than that.

I have picked 3 stocks where I had used the same techniques that I have spoken to you so far in this

guide. So let’s just head straight to them.

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1. McDowell Ltd.

Trading In A Range

Source: Spider Software India

McDowell had spent most of the last one year in a range of Rs 2,300-2,800. It was placed near the

lower end of this range. Based on my analysis I knew that there was very high probability that the

lower end of this range will act as a strong support in the immediate term.

So it did make a lot of sense to go ahead and make a buy recommendation which is exactly what I

did. I recommend a Buy at CMP of 2295 with a stoploss of Rs 2250 and target of Rs 2500-2550.

This target was achieved on the 20th of October 2014. The stock delivered a return of 11.1% in 100

days.

Recommended here Recommended Here

Target Achieved Here

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2. Zee Learn

Previous Resistance becomes Support

Source: Spider Software India

The next stock that came on my radar was Zee Learn. It had broken out of a multi-year resistance

zone of 30-32 in June 2014. It moved to a high of 38.65 but was faltering back to the retest the

resistance zone of 30-32.

The chances of the earlier resistance zone now acting as supports were pretty high. So I decided

that buying this stock on a dip would make a lot of sense. Hence I initiated a buy on it at a level of

30 or lower. I kept my stoploss very close at 28 and recommended a buy for a target of 40 which

was slightly above the recent high that it had formed.

It presented the readers with a buying opportunity in a few days as the stock dipped to 30 and even

below that but didn’t go beyond 29.20 levels. This stock achieved its target of Rs 40 within 38 days

of me making my recommendation. It delivered returns of 33% in 38 days flat.

Target Achieved Here

Recommended Here

64

3. Elgi Equipment

Channeled Upmove

Source: Spider Software India

ELGI Equipments was yet another super-duper hit delivering 28% returns in 130 days. Now this is

where it gets interesting, I had combined the two techniques that I have spoken to you so far in the

guide. One is channels and the other one is breaking above the previous highs.

The stock had closed above its November 2010 high of 106 a few weeks back. But before that, it

took a lot of effort from March 2014 to May 2014 to cross this level of 106. Immediately after it

closed above 106 level, it entered into a consolidation range of 108 to 120.

It caught my attention just when it moved out of this consolidation range. I recommended a buy at

125 with a stoploss of 105 and gave a target of 160. This target was achieved on 19th November

2014.

Now let me remind you that though these were the main tools that I employed to pick these 3

stocks I also checked other technical parameters as well before I was convinced of picking these

stocks. What are these other technical parameters? Don’t worry… I will tell you everything I know,

including this, via our regular newsletter (which you are already signed up for), Profit Hunter.

Recommended Here

Target Achieved Here

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CONCLUSION

I am sure that now even you have the knowledge like professionals do of using these technical tools

to ensure you also can find trades with a potential of delivering 6% to 20% returns quickly on a

consistent basis.

I have covered quite a few tools and techniques that professionals use in their investment analysis.

But don’t mistake thinking that these are the only tools available for analyzing markets. I would say

this is only the tip of the iceberg. There are many other important and interesting tools and

techniques that are there in my toolkit. And I would like to share all of them with you regularly.

Don’t worry! You won’t miss out on any of those. You have already signed up for the Daily Profit

Hunter newsletter, where I and my colleague Asad Dossani will write to you all about short term

investing opportunity every week. And the best part of it is that these will be directly be mailed to

you straight into your Inbox. So you can read them as per your convenience.

That’s all for now from my end.

Thank You. Happy Trading!

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