[Free Chart of The Week] Analyzing A Textbook Trend Change
On the daily chart of Balrampur Chini Mills I've numbered the areas of significance during this trend transition and in the bullets below I'll explain why each of them is important.
Click on chart to enlarge view.
1) Prices broke below their November 2016 lows, accelerating the rate of decline and providing us with a downside target of 45 based on the 161.8% Fibonacci extension of those November lows and September 2017 highs.
2) Prices made new marginal lows and quickly reversed as momentum diverged positively. They formed a pivot low before meeting their downside objective, which was the first signal that we may not reach the target determined by the initial breakdown in March.
3) Prices consolidated for a few months and eventually tested their May lows and quickly reversed. However, on this test momentum wasn't anywhere near oversold territory, signaling diminishing selling pressure.
4) Prices broke the downtrend line from their November 2017 highs and then corrected through time, rather than sellers quickly pushing them back below that resistance level.
5) Prices rallied back into the initial breakdown level as momentum gets overbought, confirming the new highs in price and transitioning it into a bullish range.
6) Prices pulled back from resistance, but pulled back to the top of the April-August range and were quickly met by buyers that propelled the stock through all of that overhead supply.
7) Prices exceeded their November 2016 low by a significant margin, but momentum did not confirm their new highs. They've since corrected back toward that former support level and are continuing to work off that bearish momentum divergence through time, rather than price.
8) The 200-day moving average is now rising, acting as a tailwind for higher prices and momentum remains in a bullish range. Prices are now trying to emerge from this two month base and begin trending up toward 135.
At this point its clear that the reward/risk remains in favor of the bulls as long as prices are above 95.50, with the objective of trending toward 135 and eventually their 2017 highs near 182.
But besides a trade idea, the point I wanted to highlight is that in a nine month timeframe we were able to witness a clear shift from down, to sideways, to up in the stock's intermediate-term trend. Because trend changes are a process and not a single point of time, this type of analysis can be done and inform our decisions in real time.
At each of these points there's no way we could have predicted exactly how the stock would act going forward, but by identifying the subtle shifts in supply/demand shown in price action and momentum, we can at least be aware of what the possible outcomes are...because if you don't have an idea of what's possible, you cannot define your risk, determine profit targets, or do anything else necessary to put a trade on responsibly.
I hope this explanation was somewhat helpful for you all. As always, if you have questions or comments about anything, let us know!
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Allstarcharts Team