Fractal Nature: Can you identify the difference between the below two stocks SBI and Tata Motors belonging to the separate sectors and industry?
The below research is picked up from monthly research report – The Financial Waves Monthly update published on 6th October 2016.
The below charts only highlights to the fact that how highly correlated can stocks become during the corrections. Below charts are of two different stocks – SBI (blue) and Tata Motors (red). It is indeed amazing to see such fractal nature irrespective of their fundamentals and time frame.
SBI belongs to the Banking industry and Tata Motors within the auto space. Both of them have very different business model but at times they exhibit extremely high correlation. Look at the below chart again and at a glance you will think both the charts are of same stock. Since 29th August 2016 we can see that SBI and Tata Motors have been moving in lock step fashion. Infact the percentage change on daily basis had been more or less similar.
Figure 4: SBI and Tata Motors hourly chart tomorrow (chart as on 5th October 2016)
Case in point is above charts clearly reflects that diversification might not necessarily help. The events of 29th September also resulted into sharp decline and similar reversals in these stocks. During major corrections the correlation increases across all the stocks and not only a few. Think again if you are really diversifying by using multiple stocks in portfolio!
……………… This is a very different way in which technical analysis can be looked upon and trust me these are subtle but important changes.
Fractal nature also forms the building block of Elliott wave analysis. Elliott wave helps us to understand the maturity of trend and the probable scenarios. During middle of complex correction it is important to rely on other basic technical analysis method but once the pattern is near completion Elliott wave provides very high probable trade setups. So combining both basic methods with Elliott wave becomes extremely important and when both are in sync one should not think twice to pull the trigger!
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