Potential Counter-Trend Trades

JC Parets
June 11, 2018

Typically we look to trade in the direction of the underlying trend as that increases our probability of success, however, occasionally lower-probability counter-trend trades offer reward/risk scenarios that are ridiculously skewed in our favor. Today we'll be looking at some of those setups where there are bullish momentum divergences and failed breakdowns that help us to define our risk and put probability in our favor.

A good example of this type of setup is Unichem Labs. Prices have been range-bound for most of the last three years and have been declining for most of 2018. Last week they undercut the 2017 lows and quickly reversed, confirming the potential bullish momentum divergence and failed breakdown. This suggests being long if prices are above the prior lows of 236, with a target near the middle of the range at 285.

Click on chart to enlarge view.

Here is a list of stocks offering a similar opportunity on the long side:

Bank of India is consolidating toward the bottom of its 2.5-year range within a falling wedge as momentum diverges positively. A breakout above 105 would complete this pattern and suggest being long with a 132 price target.

Andhra Bank undercut its 2008 lows in both March and May-June of this year, but are now attempting to break back above them. If prices can break above the confluence of resistance near 38.10, prices could rally toward the 200-day moving average and prior support/resistance near 47.75.

Oriental Bank of Commerce made a new all-time low in May and retested that low last week as momentum put in a higher low. Prices are also back above the 2016 lows (former all-time low) and are clearing the downtrend line from its January highs. As long as prices are above 80.50, we want to be long and look to take profits near 102.

Bharti Airtel Ltd. undercut its April lows and quickly reversed back above them. As long as prices are above 375 we want to be long and taking profits near 430.

Syndicate Bank undercut its 2016 lows as well and is now back above them, confirming the failed breakdown and bullish momentum divergence. We want to be long above 48.50 and taking profits at 61.50.

PTC India is testing former support / resistance from 2012-2014 and is roughly 60% from its 200-day moving average, so as long as prices are above 17.50 we want to be long and taking profits near 30.

Wipro is another name that met our downside price target and has begun to bounce. As long as prices are above 253.80 the bias remains to the upside with a price target near 284.50.

For the third time in roughly 5 years, Punjab National Bank has undercut support near 90 and reversed back above it. We think that this time is no different than the first two and therefore want to be long as prices are above 90 and look to take profits near 128.

Emami Ltd. is a range-bound stock at the bottom of its range as momentum divergences. As long as prices are above 995 we want to be long and looking to take profits at the top of the range near 1235.

Sun Pharma has been consolidating for a year now and is headed back toward the top of its range. If it can clear resistance at 597 we want to be long and taking profits near 726.

Lupin Ltd. is the last stock on our list as its been consoldating for several months as momentum divergences. If the stock can clear the confluence of resistance near 825, we want to be long and taking profits near 960.

The Bottom Line: Counter-trend trades are difficult, but have their place in our plan when the risk is well-defined and the reward/risk is ridiculously skewed in our favor. Many of the stock above are from the PSU Bank and Pharmaceutical sectors which have been beaten down and may now experience a relief rally. Due to the psychology that drives these types of setups they should work quickly, if they work at all, and if they don't we have our risk management levels to protect capital and stay in the game.

Thanks for reading and let us know if you have any questions.

Allstarcharts Team

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