Potential Mean-Reversion Opportunities

JC Parets
May 13, 2019

When trading against the primary trend, there are a few things we look for to define our risk and raise our probability of success.

We outlined them in a post a while back, but they essentially boil down to the following:

  1. Our downside price target has been met.
  2. Prices undercut that price target and quickly reversed.
  3. Momentum diverged positively as prices made a new low.
  4. Prices are very extended from their mean (200-day moving average).
  5. Quick follow-through confirmed the supply/demand imbalance.
  6. Short interest in the stock (not required, but amplifies move).

We are now seeing a few potential opportunities given that stocks have been hit, some harder than others, over the last few weeks.

Here's Reliance Infrastructure quickly reversing off our downside price objective near 100.30 as momentum diverges. As long as prices are above that level, we can be long with an initial upside price objective near 140.

Click on chart to enlarge view.

Godrej Consumer Products is retesting support at its 2018 lows. As long as prices are above 628, we can be long for some mean reversion toward 730.

Yes Bank has gotten hammered recently, but momentum is diverging as prices try to stabilize at its 2018 lows. As long as prices are above 157, we can be long with a target near 210.

If prices in Jain Irrigation can close back above 51, we can be long for some mean-reversion toward 61.

As long as prices are above 72.95 in Gujarat Mineral Devleopment Co., we can be long for a move back up toward 90.

Given the nature of these types of trades we can expect a few whipsaws before they work, or they may not work at all, but in all of these setups the high reward/risk at current levels offsets the low probability nature of each individual trade. Be sure to incorporate that thought process as you size these trades and manage risk once in them.

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

Allstarcharts Team

Filed Under