After a more than 40% year-to-date and 60% 2-year decline, we’ve been eyeing Tata Motors on the long side for some mean reversion. For the last two months the stock has been range-bound, but the recent breakout has shifted the reward/risk in favor of the bulls over the short-term.
Below is a nearly 4-year daily chart of Tata Motors Ltd. showing the steep declines noted above. With that said, prices broke below their 2016 lows in June and began consolidating within a relatively tight range as momentum diverged positively.
Click on chart to enlarge view.
Friday, prices were able to close back above the 2016 lows at roughly 2-month highs, confirming the potential failed breakout and bullish momentum divergence we’ve been watching. This provides us with an opportunity to be long the stock if it’s above 266, with an upside target nearly 20% higher at its 200-day moving average and former support (326).
We like this type of setup because our risk is very well-defined and the reward/risk is skewed in our favor. Additionally, we’ll likely know if we’re right or wrong here very quickly, as we did with our mean reversion trade in Hindustan Construction. From failed moves come fast moves, so it’s important we see follow-through shortly after getting confirmation.
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