Identify Distribution (top) in any Stock

Identify tops with distribution bajaj finance
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Someone bought Bajaj Finance at 3600, only to see price drop to 3000 in matter of a few weeks. Someone bought Vinati Organics at 2200 levels, only to see price drop to 1766 in a few days.

There are countless such occasions when retail investor invests in a stock, almost always near the high. Why does it happen? And how can investors avoid the pitfalls of investing near the highs and later waiting for their price to return? Let us learn.

Before we jump to learning, let us take a pause and analyse as to what typically happens with retail investors.

Let us take an example of Bajaj Finance for easy reference.

  • Bajaj Finance moved up from 2800 to 3800 in matter of few months.
  • Retail investors, perhaps did not see the rally coming in and missed to enter at 2800
  • Investors entered only after price crossed 3400 and pumped in more money after seeing price appreciate all the way to 3600+; giving them more confidence and a sigh of relief that they did not miss the bus.
  • Price starts correcting from the top and investors kept on averaging without understanding what is going on in the stock. Averaging done around 3600-3400
  • Price falls to 2990
  • Retail investor is in desperation & starts looking for lower and lower levels to invest, only to see price turn around from 2990 to 3400

All in allRetail Investors were unhappy at 3600 & they were still unhappy at 3000.

Identify Distribution (top)

Let me now post a chart of Bajaj Finance to discuss this in detail.

Bajaj Finance near term top with distribution
Bajaj Finance near term top with distribution

Notice the two blue boxes highlighted on candles. Notice the following:

  1. Bajaj Finance took 26 days to move from 3359 to 3600 (approx)
  2. Observe the candles in 2nd blue box now when price moved from 3700 to 3750 (approx) – No clear sign of buying or selling. Most are doji candles indicating indecision
  3. Now observe the volume as highlighted throughout – Learning iswhen there is a distribution,it is always on low volume with stretched timeframe so that no sharp down moves come and biggies can easily offload their stock while retail keep on providing liquidity and opportunities for them to exit’.

Learning

No stock runs up forever

  • Retail euphoria is really special & many so called elderly core investors ignore such signals and invest heavily near tops
  • Not that Bajaj Finance will not move higher, but if you look at it closely – there is an opportunity cost that is lost.
  • For eg. : Someone buys 100 shares at 3750 but the price falls to 3000 in a few weeks. Now the only choice he/she has is to hold and HOPE for lower levels to buy more.

Instead, if someone could identify the top with distribution, investor could have bought 125 shares for the same money invested at 3750, but buying at 3000 was not possible as capital was invested already at high.

Worse is yet to come so hold on……

The ‘unexpected’ Turnaround

Price is now 3000 and investors are fully pessimistic on the company and even expert chartists starts drawing lower levels forcefully. So many kept giving targets lower and lower, but price moved up sharply from 3000 to nearly 3500 now.

The real role of a technical analyst is not to be biased with price action, but to find realistic levels. Not many technical analysts could really understand what it meant for Bajaj Finance had it broken and fallen below 2990. It would have been a structural weakness had that happened.

Conclusion

When you invest, always look at a chart to know what is the sentiment of market participants. Do not let your emotions drive your decisions

When stock falls, do not get carried away and hope for lower levels. Try to find realistic levels.

Always try to optimize your investment – better to look at chart and not buy at 3750. Also, better to look at chart and buy at 3000.

Doing this would have resulted in investor buying 25 additional shares – This is what retail investors miss in the big game. Such small delta when accumulated again and again makes wealth. Others may make money anyways. Question to you is – Do you want to make wealth or money?

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1 Comment

  1. NARESH
    18th August 2019

    Ameya Sir Ji,

    Hearty Congratulations for the Blog Launch & All the Best
    &
    Thanks a Ton – This blog will help every Investor/Trader

    Question to you is – Do you want to make wealth or money?
    WEALTH ……..

    Reply

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