Pizza, Price patterns, Breakouts and more

Pizzas are delicious, aren’t they ? And seem even more delicious when they are free right ? Yesterday, a friend of mine treated me with this super awesome pizza. Want to know why ? The answer lies in the book kept below the pizza box.

A few days back I suggested a friend of mine to buy the stock of ADANI ENTERPRISES, it’s market price at that time was around 159–160 ₹. Today it closed at 196.5 ₹ and my friend booked a whopping profit of 22.5% in a span of 20 days. So, I guess my pizza was pretty well deserved.

Now coming to how we at Trading Sense, knew this was going to happen. Like the last article I won’t be giving a prologue on the company as this trade was completely based on charts, patterns and technicals with some inspiration from a news reaction.

LONG TERM ANALYSIS : DETERMINING SENTIMENT

So, let’s begin our analysis by observing ADANI ENTERPRISE’s 5 year chart with weekly frequency candlesticks.

Now notice how the ticker keeps hitting the same price point of 131.39 ₹, but fails to cross it. It looks like a long term resistance. The second noticeable thing in this chart is how lows keep increasing every time the stock returns from the resistance (first swing low~23 ₹, second swing low~60 ₹). It looks like every time the bulls try to push the price above the resistance and fail, they at least don’t let the price go as low as the previous low, signalling overall bullish sentiment. Also notice the high volumes, every time the price comes near the resistance, signalling confusion in the market and evident reversal or the anticipation of an extreme trend. To the contrary, extremely low volumes near the swing lows suggest low confidence of the market participants in the current valuations. We can also clearly see that the volume near the higher swing low (right side) is significantly higher than the volume near the lower swing low (left side) confirming our hypothesis of a bullish sentiment.

After hitting the resistance the second time, we can observe the price repeatedly hitting and sometimes even crossing the resistance and swing lows not going very low implying that a breakout is inevitable and the significant spike in 20 day average volume confirms this.

Seems pretty intuitive, right ? Turns out, this is a modified form of a classic chart pattern traders have been using for a long time. It’s called the Cup and Handle. (Look at the pizza picture again).

There are proper mathematical constraints defined for confirming this pattern although we feel sensible trading is understanding the thought process behind the pattern rather than just identifying shapes and placing trades based on that.

For example, it is said the depth of the cup (first swing low) should <1/3 (1/2 in high volatility cases) of the high (resistance). 131.39/3=43.8 ₹ and ours is 23 ₹ so well below the mark even though ours is a modification of the pattern. The depth of the second cup (Second swing low) which is the immediate predecessor to the handle also follows the given constraints. 131.39/2=65.69 ₹ ~ our swing low of 60 ₹ (the second cup is more volatile hence 1/2).

Hence, if your thought process is right, the math finally adds up.

SHORT TERM ANALYSIS : DETERMINING ENTRY/ EXIT

Now that we’re sure of the long term trend, now it’s time to study the short term technical indicators to determine our exact entry/ exit points.

This is ADANI ENTERPRISE’s daily candlesticks chart. The blue horizontal line is our resistance from the long term analysis. We see the price has crossed that line a number of time before actually breaking out (Those are called false breakouts). I told my friend to buy a little later after the vertical blue line I’ve made on the price graph. Here’s why:

1. The price had crossed the resistance for a long time now and had recently made a low near the resistance but still opened above it the next day.
2. MACD crossed the signal line. (MACD is a reliable indicator for confirmation once the price has broken the trend resistance).
3. Bollinger band width decreased significantly (bollinger squeeze) signalling an incoming trend.
4. Extremely high volumes (marked yellow).

All the technicals signaled an entry, but still I told him to buy it a little later. Why ? Don’t you think it’s the dumbest way of thinking that just because some line crossed another line in the past and something happened, so the same thing will happen when the both lines cross again? Of course, no.

Though technical indicators give us good approximations of price movement, there always has to be some reasonable news catalyst or fundamental announcement, else what you’ve captured is just time series noise.

In this case, that trigger was the Gujarat election results. Adani Enterprises is a Gujarat based company and Adani is known to be a pro Modi supporter. Days near election results are always volatile so that gave us the high volume to anticipate the breakout and liquidity to buy at a desired price. Initially, the Congress party unexpectedly led the tally resulting in all Gujarat based/ Adani stocks suffering corrections. Ultimately BJP won the elections with 99 seats resulting in rise of all stocks that corrected the previous trading day. Adani Enteprises also increased to 160 ₹ with high volumes and significantly above it’s resistance and hence, the breakout was confirmed and I told my friend to place the trade.

FINAL TRADE SETUP

Accumulate on dips of 155 -160₹

Short term target: 185 ₹ (Already achieved)

Stop loss: 150 ₹

Accumulate on dips of 180 -185₹

Long term target: 235–245 ₹

Stop loss: 135–145₹

Do customize your targets and stop loss according to your capital allocation and risk/reward metrics.

One major request, don’t blindly copy this idea. Rather, try to properly understand the thought process behind the recommendation and validate our setup using your own rationale before investing. Keep Trading Sense!