5 technical formations. 2 top Sensex stocks. Here’s what you can learn from their 2019 movements.
The benchmark S&P BSE Sensex advanced 14.6 per cent in CY19, while the Nifty50 and Nifty Bank indices added 12.2 and 18.5 per cent, respectively.
But it is the individual stocks that teach us important lessons. Take for example the ICICI Bank and Bharti Airtel stocks. Their share prices showcased 5 classic technical formations.
Let’s start with the ‘Inverse Head and Shoulder’ pattern that was seen in Bharti Airtel. This is a technical indicator which is used to predict reversals in a downtrend. Usually, it involves two highs which the counter retests and sees correction. Among the three lows, one of the lows is below the rest two. The counter sees a breakout on the third attempt visualising the upside.
In Bharti Airtel, the formation of “Inverse Head and Shoulder” pattern resulted in a jump towards Rs 480 levels, as per the weekly chart.
Interestingly, during the same phase, the Moving Average Convergence Divergence (MACD) had a double bottom formation.
Moving Average Convergence Divergence (MACD) is an indicator that shows relationship with two moving averages called the MACD line. Then a nine-day EMA is plotted on the MACD which normally serves as a trigger for buy and sell. The zero line differentiates the momentum, MACD above zero line shows positive momentum and vice versa. (Can we explain this with respect to the Bharti Airtel share price, about what happened?). As the counter shows a buy trigger rising above the zero line, the price jumped over 50 per cent from Rs 318 to a high of Rs 485 levels.
The ‘Double Bottom, meanwhile, is a formation that resembles a “W” structure and says about the counter making two lower bottoms before breaking out. (Can we add another example here?). The first bottom was around “-17” value and second at “-21” value on the weekly chart. The similar formations were seen in stocks like Reliance Industries in the month of August – September 2019 and Bajaj Auto in the 2018 in the weekly chart.
There was a Golden Cross of 50-weekly moving average (WMA) with 100 WMA and 200 WMA on the weekly chart of Bharti Airtel. (Can we explain this with respect to the Bharti Airtel share price, about what happened?). The 50 WMA crossed 100 WMA at Rs 330 level and 200 WMA at Rs 335.90 levels respectively.
For those follow the ICICI Bank stock, RSI would have come handy.
The Relative Strength Index (RSI) is a momentum indicator that determines the overbought and oversold conditions by measuring the magnitude of recent price changes. Developed by J Welles Wilder Jr, RSI shows that a stock is overbought when it breaches 70 value on a reading scale of 0 to 100 while it becomes oversold when it slips below 30 value. Overbought condition speaks about trend reversal or correction, whereas oversold region suggests undervalued price.
ICICI Bank’s counter only once closed below the 200-DMA in the entire year. Likewise, the RSI witnessed a dip in the oversold region at the beginning of the year and that too was for only one session.
Lesson to learn
Such patterns are often found in many stocks. What new technical traders can do is keep an eye for the start of such patterns. Here are some thumbrules/tips they can follow.
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