What will you do, What will you do

The toughest thing in markets is to action when things aren’t going the way one hoped it will be. When markets are going up, the biggest worry for most investors and traders is that they haven’t loaded up enough to benefit from the rise and when it starts to fall, and when it starts to fall – man, most of them are caught up in the “Deer in the Headlights” syndrome – fixed feet unable to decide whether I should even move a damm muscle.

When markets plummeted 600 points (Nifty) in a matter of days, anyone caught on the wrong foot would have had it tougher by the day to take corrective action. Much of this can be ascribed to the “Sunk Cost Bias” that affects every one of us. After seeing a 400 point loss, would you consider cutting the position or sitting tight or worse, adding in the hope that a small recovery shall make good all the losses suffered till then?

The advantage for guys who use charts is that they provide you with clues on what may happen if a support or resistance gets broken  (can be a many a time a major inflection point). When a stock or a Index breaks below what is known as a major support zone, you know that the probability of a rise now looks even dimmer and the best way to handle the situation is to either take a hedge or better, exit the position and wait for a new Signal.

Its much tougher for fundamental investors who have piled into a share to take evasive action since their signals aren’t like the one of technicians. You don’t get the company to make a announcement every time their stock tanks nor can you expect earnings reports to be updated after a major rise in the company’s share price.

Lets use a real life example – Kitex. This is a stock, that is as far as I know, that most value / fundamental investors have fallen in love with. Great business, nice earnings and hopefully a great future. The stock for a long time did not disappoint them either as it surged from trading in single and low double digits to something that was traded in 4 digit numbers.

All that changed when the company came out with its first quarter results for 2015 on 21st July. The company’s results were not what analysts had expected and given the premium valuations, it was natural to see a slump in the price of the stock. For a trader who uses charts, this would have been a clear exit signal as it broke through several support zones without as much as pausing.

When a stock price pierces several Resistance / Support zones, one indication is that the buying / selling is too strong and hence all the selling / buying that would have happened at those zones were not enough to change the situation.

The stock then continued to decline as it gutted away the gains that were accumulated in the previous months before it stopped at 575. But why 575 and the reason is that this was the place from where it had taken off in April. To add to that, this was also the breakout zone (once failed) which made the level even more of a worthwhile candidate to risk buying at.

Either way, it did work as the stock through much of the fall – but did it reverse course completely – of course, not. The price did not even catch up to the price at which it opened after the bad results. The slide that has taken place from there was not as sharp as earlier though we did fall and this time, even the old support wasn’t good enough.

But unless a stock moves into All time Low zones, there will be areas of support and for Kitex, there is a glimmer of hope at the levels between 422 and 437. That tiny gap which wasn’t filled is the next best hope. When I started writing this, was inside that very area. I even tweeted the chart showcasing the gap (Chart below).

As of now, the stock has bounced off from that zone, but will that hold? I don’t know and I honestly won’t care. But the fact is that for some one who looks at charts to trade, this is a area which provides a good risk reward opportunity. If it works, well and good, else one takes a small loss and exits in the hope that there will be another potential trade somewhere ahead.

Technicals is not about catching those bottoms or selling at the tops. Its all about listening to markets and going with the flow – no one has survived by trying to swim against the tide, not even John Paulson who if reports have to be believed has been forced to pledge his personal properties to ensure that he can remain in the trade (that for the time is wrong). He got it right in 2007 / 08, but will he be second time lucky?

What will you do, What will you do if your stock breaks that major support

Sell Sell Sell

What will you do, What will you do if your stock cruises past that major resistance

Buy Buy Buy.

What will you do, What will you do if your stock doesn’t behave as you expected

Run Run Run

for there is always another trade around the corner waiting for you.