Knowing Yourself As A Market Participant

The stock I'm talking about is Reliance Naval & Engineering Ltd. This micro-cap stock looked like the typical failed breakdown mean reversion setup that we've spoken about on the blog and have taken advantage of in some Pharma and Public Sector Bank stocks earlier this year.

Click on chart to enlarge view.

Something about this setup was different this time around, and it really threw a wrench into my normal thought process.

Here's how I thought about it.

The risks:

It's super small at a market cap of 9.2 billion Rupees ($131 million) and trades ~ 1m shares per day (~1.5% float). Putting aside the fact that very few institutions can take a meaningful position in this without moving the stock, even if they could, it likely wouldn't move the needle in their portfolio.

It's declined 80% in 6 months and in April its auditors issued doubt about its ability to continue as a going concern. I know we're Technicians and don't care about the underlying company, but to me this signals a higher potential for a fundamental or news driven event occurring, elevating risk.

It's not shortable, which means the price reaction may be slower and less powerful than the typical failed breakdowns we look at.

It's not optionable, which means we have to play it via the common equity, making it more difficult to define our risk.

It's in an under-performing market-cap segment and an under-performing Industrial Manufacturing industry group. A bit of a double-whammy.

The reward:

The reward to risk is ridiculously skewed in our favor at over 100/1.

The Conclusion:

Thinking about it from my perspective, I'd gladly take the position despite the risks because I'm a 23 year old speculator looking for outsized capital appreciation opportunities, but not everyone is me. When I'm writing, I have to be sensitive to who our audience is and what's of value to you all.

Some of you reading might be working at, or have clients at, an institution that couldn't touch this stock if they wanted to. Others might be individual investors running their own portfolio and looking to our research to help avoid large market draw-downs. They have no interest in this type of bottoms-up individual stock analysis. Others might not even be subscribers and are just here to learn more about the Indian stock market and Technical Analysis.

You get the point. No one person is the same as the next, and therefore, we all have different objectives and approaches to financial markets.

And so rather than write up a post about a micro-cap stock with a potentially massive upside, I thought it would be more valuable to use this post as a reminder to us all (and myself) to revisit the question "Who am I ask a market participant?".

Hopefully you all revisit it regularly as your lives change and processes evolve, but if you don't or haven't in a while, I'd invite you to take this weekend and give it some thought. My bet is that you'll find that this small investment in yourself is far more valuable than any single trade setup I could've discussed.

If you do perform this exercise and learn something, share with us on Twitter @BruniCharting and @allstarcharts. We'd love to hear from you.

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

Allstarcharts Team