Trading or Investment success depends a lot on Stock selection and Timing. In case of Investment timing can be off to some extent but in case of trading timing is again a very important element.
Now let us try to see a very simply method to select a stock either for Momentum trading or for Investment purpose. A few might not agree with the below methods if they are contrarian traders or value investors. But that is what results into market movement after all!
The below technique shows two well known companies – Bajaj Finance among the news post it touched 10000 mark giving exorbitant returns in just few years and the other one is Reliance Capital stuck in medium term downtrend post the top made in 2014.
We can clearly see inverse movement in terms of trend in both of these stocks and for a momentum player one should trade in direction of all the trends – short, medium and long term. Bajaj Finance has continued to be a strong outperformer and this stock rose by nearly 10% even after so many months of already up move.
Look at the charts carefully and let us continue our discussion:
Bajaj Finance and Reliance Capital line chart:
The blue line chart representing Bajaj Finance clearly highlights increase in momentum with each passing day. The valuation might not be justified that many fundamentalist might argue but the least line of resistance is on upside and any dips should be utilized as buying opportunity unless and until we see a clear reversal sign or formation of lower highs and lower lows.
I would rather avoid buying an underperforming stock like Reliance Capital both for trading or investment because the fastest way to see increase is share value is with the one which has least resistance on upside. In Reliance Capital each rise will be stopped even though temporarily by the supply from investors who are stuck in the stock for many months or years. This will result into intermittent pause or reversal on downside whereas if a stock is trading at new highs it is everyone’s guess how far and how fast it can go! Trust me catching a top in such outperforming stock is not possible and if someone claims to know he is probably just a novice.
Case in point: In stock market one should never try to think that the stock has already doubled so how far it can go… Bajaj Finance is a classical example that shows rise of more than 10 times in just few years and inversely one should avoid catching a low in falling stock by guessing how much more it can fall else you can be stuck in stocks like HDIL, Suzlon, Reliance Capital and many more that are still trading way below its top made in 2008, rest alone the opportunity loss for these 8 years!