Move Started, Should I Buy Now?

The above question from one of the blog readers prompted us to do this post. As a matter of principle, we discourage our investors from chasing price. We believe in having a rational and technical basis to arrive at a stop loss and target. We do not pick these levels randomly. If you chase price and buy a breakout, it would mean, the entry is farther away from the designated stop loss and to that extent closer to the target. This basically distorts the risk-reward equation.

We prefer investors participate in a breakout move by taking a long or a short trade in the prior corrective move ahead of the breakout.  If you are a compulsive breakout trader, then at least try to be early in the move and take a trade when you sense that there is some momentum building up.

Please realise that the person with an agenda to buy a sizable quantity of a company’s shares  would not be dumb enough to expose his cards by aggressively accumulating his merchandise in one go. The person concerned would orchestrate a move to ensure that he gets his desired quantity at an advantageous price before the actual breakout move happens.

Take a look at the Mahindra & Mahindra Finance chart featured below.

Pay attention to the first breakout move Oct. 29. The huge rally was accompanied by big volumes, which is good enough to lure the average breakout trader. The smart money then abandoned the counter and the stock got into a trading range for weeks. Chances are that, by this time, those breakout guys would have lost patience and exited.

For an astute student of technical analysis, it is not surprising to notice that the prior resistance at Rs.285 acted as support. This happened and price took support at this level on multiple occasions.  That pull back provided a far more compelling trading opportunity.

Now direct your attention to the second breakout that happened on Nov.26. This again was on the back of huge volumes and the stock went into a consolidation thereafter. What is of interest is the multiple lows that happened at Rs.294-ish  last week. A clear sign of mopping-up activity ahead of the rally today.

The point we are harping at is that it is not that difficult to identify the trail of the smart money and its involvement. And, big moves seldom happen without smart money’s involvement – simple supply-demand dynamics. If you are adept at reading the clues from the price action, it would help you make an informed judgement and get you one step ahead of the average trading crowd.

What do we expect in Mahindra & Mahindra Finance? He is our long term view. This view would be invalidated if the stock cracks below Rs.280.