Vedanta Ltd. Begins Voluntary Delisting

Let's start with Vedanta's long-term trends on an absolute basis and relative to the Nifty 50 on Tuesday, April 14th.

Below we can see prices had fallen back to a 12-year support level near 60 as momentum registered another oversold reading. With prices down 85% since their January 2018 highs and 65% in a little over 10 weeks, the likelihood that prices would break right through to new all-time lows and continue falling was not the bet we were making.

Click on chart to enlarge view. 

Simply looking at the chart above, it was clear the reward/risk on the short side was no longer what it once was...bringing us to our first lesson.

Lesson 1: Respect your price targets. When the market meets your objective, get out and reevaluate. 

Could the stock have gone lower? sure! But that's not our problem. Our target was hit. Take the profit and come back with a fresh perspective.

The second chart that caught our attention back then was Vedanta relative to the Nifty 50, which made new all-time lows on waning downside momentum and was trying to reclaim support. This potential failed breakdown in its relative strength was what set it apart from the many stocks that were also at a major support level on an absolute basis.

It's at this point the thesis became more than just cover shorts and move on. The stock was potentially putting in a major long-term reversal on both an absolute AND relative basis. With the reward/risk so clearly defined, even with prices in the mid 70s, we decided it was worth a shot on the long side to see how it developed.

But we wouldn't have been able to do that without lesson #2, which is that we should always remain open-minded about a security (or market) and what it could potentially do in the future.

Flipping from short to long the same stock in the matter of a few days or few weeks requires a lot of mental flexibility. You just made a ton of money from this stock collapsing 65% in 10 weeks and now you want to turn around and buy it? It sounds crazy and is often not the right trade to put on, but being open-minded enough to explore that possibility will allow you to identify and capitalize on opportunities like this that occur all the time.

So here are the same charts updated through today.

So did our thesis play out? Well, it was certainly on its way when the company decided to interrupt the bottoming process by going private. I guess there was a lot of demand waiting down at these levels!

Regardless of how this trade turned out, the two lessons here are clear: 1) respect your profit targets (and stops) and 2) be open-minded about where a stock can go in the future.

Hope this little case study helped provide some insight into our thought process when approaching markets. If you have any questions or comments, get in touch! We'd love to hear from you.

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Allstarcharts Team