I regularly do monster stock analysis & try to derive measurable technical points that can help find or hold a stock for maximum gains.
You can read monster stock study points here
You can also read monster stock analysis for GMM Pfaudler here
Please note that these study points are inspired from a book called Monster Stocks. This book is written for US markets and my attempt is to map the philosophy with Indian markets. I also add my own analysis from time to time.
In one of the chapters of this book I read that – if a stock scalps down with a significant price action at 50 MA then it is a sign that smart money is exiting that stock.
If we take this learning at its face value, we would straightaway discard Bajaj Finance. Have a look below:
The way Bajaj Finance came down from 50 MA clearly validates the teaching from the book. However, in my experience, this teaching is incomplete.
First of all, this teaching is valid in normal situation and not black-swan events or pandemics or war like situations.
Second, it is possible that a monster stock comes scalping down from 50MA and goes significantly below it. But, when we put things in a right context, we realize that monster stocks go through certain events in their lifetimes when these stocks scalp down their 50 MA.
How do we interpret this?
If we look only from the perspective of the teaching in the book, we may not be able to see the full picture. It is important to REALLY know if smart money is getting out when stock severely scalps down from 50MA?
Let us look at another stock called as Divi’s Labs.
If you notice following:
- Stock scalped severely down from 50 MA and stayed below 200 MA for sometime
- Stock recovered fairly and consolidated near 200 MA
- Finally resumed its Monster Run and delivered 400% returns from the bottom
What does this tells us?
We cannot take it for granted that scalp down from 50 MA is a biblical truth. In fact, smart money may have been actually BUYING the stock and not selling.
Let us now revisit Bajaj Finance to put things in perspective.
- Bajaj Finance scalped down severely from 50 MA
- Dipped below 200 MA
- Recovered quickly above 200 MA and is consolidating near it
- Recovered with HIGHEST EVER buying volumes
If we correlate Divi’s Labs & Bajaj Finance, we can safely assume that even monster stocks correct and scalp below both 50 MA and 200 MA, but it is not enough to discard the idea for investment.
It is important to see how does stock behaves AFTER it has scalped down.
Can Bajaj Finance resume its Monster Run and deliver similar returns as Divi’s did? Only time will tell, but signs are there for wise man to understand.
During normal times, monster stocks do not scalp down the 50 MA with heavy volumes. But during times of sudden draw-downs, if a monster stock scalps down 50 MA and also 200 MA, but fiercely comes back above 200 MA with even higher volumes and builds a base around 200 MA then it is that one rarest of the rare opportunities you would get as an investor to buy the stock and still be part of the monster rally.
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