How Trend Channels helped me pick stocks this Diwali

Apurva Sheth
Before I move any further I would like to wish you all a very happy new year on behalf of Profit Hunter & Equitymaster. I pray that all your wishes be fulfilled in the New Year and may we be able to play a role in that. I hope your association with us grows leading to bigger and sweeter fruits for you.

I promise that this journey along with me in markets will be enriching and give you a different perspective to trading/investing. We at Profit Hunter have been working with a single focus that is ‘YOU’. All our endeavors are solely driven by a motive to benefit you our readers. Your response to the articles I wrote you so far has been very encouraging. I request all of you to continue to share your views, thoughts, feedback, doubts, and queries on the topics I discuss. And I will be more than happy to revert.

As I promised last time I will show you how I used Trend Channels to pick stocks this Diwali. But before I move to stocks let me just give you a background about markets at that point. Nifty had hit a high of 8,180 in September 2014. It was trading sideways with a negative bias for about a month. However many Midcaps had topped out way ahead of Nifty. But they didn't fall instead they consolidated and remained sideways. I picked up stock which were in a well-defined uptrend on weekly charts. They were going through an intermediate correction in a long term uptrend. Let me explain you this with a generic chart.

Using Trend Channels to pick stocks
Source: Profit Hunter

The illustration above shows a generic chart of all the stocks with a particular pattern that I was looking for before picking stocks this Diwali (All the stocks that follows were picked on 22 October 2014 - a day before Muhurat Trading). This is just a sample illustration to explain the process I followed to pick stocks, the actual angle, width and no. of times price touched the channel etc. will vary in the actual example I will show you later.

So the first step was to look for stocks (preferably Midcaps) that were in an uptrend. So stocks that were trading in a rising channel became an obvious choice.

Next was to look for stocks that had already touched a high and had either corrected from the top or were consolidating. So I was looking for stocks that were moving from point 1 to 2 marked in the above chart. (Let me remind you again that this angle of descent from point 1 to 2 varied across stocks.)

The reason behind selecting stocks that had already corrected was simply to get a better risk reward ratio for long entries. There were quite a few stocks which had not gone through any correction and were rocketing ahead but choosing those stocks would mean taking higher risk which is against my style of trading. I strongly believe that as a trader one should always give priority to capital protection over profit maximization.

Many people miss this point completely. They are lured into the market because of their greed. Many a time's retail investors fall trap to the hull bulla created by the financial media when indexes are hitting new highs. They enter the markets (to make a quick buck) when the smart guys are exiting. The poor guy eventually ends up losing his shirt while the media and broker go laughing to the bank.

They forget a very important principle that even in long term uptrends there will be corrections along the way. No stock can move vertically upwards for infinity. There will be correction or consolidation along the way which will give them opportunity to enter. However, I am sure you 'My Reader' will not make this mistake as you all know the market cycle model I explained you in an earlier letter.

Now that you know the thought which I put behind selecting these stocks. Let's check some of them.

Simplex Infra weekly chart
Source: Spider Software India

Simplex Infra bottomed in September 2013 at 38 and moved as high as 392 by July 2014. The bulls were exhausted and so a correction followed which halted at the main trendline drawn from the September 2013 lows. From a level of 246 on 22nd of October this stock moved as high as 399 in a matter of weeks.

Repco Home Finance weekly chart
Source: Spider Software India
Next one in line is Repco Home Finance which has been a smart mover since it started trading in 2013. It bounced off from the main trendline drawn by connecting the September 2013 lows to March 2014 lows.

Care Rating weekly chart
Source: Spider Software India
Care Rating touched the channel line and gave a descent correction in a couple of weeks. Though it didn't touch the main trendline on 22nd October 2014 the distance wasn't too far. The risk reward was still favorable so I decided to go ahead with it.

HEG Ltd. weekly chart
Source: Spider Software India

HEG Ltd. was one of my stock pick which failed miserably and despite a minor bounce it couldn't sustain there and dragged lower. Although I had a stoploss which restricted the loss on capital.

Let me remind you that I also used other tools along with channels to reconfirm my view. (One cannot trade based on only one or two tools) But channels were the foremost criteria for selecting stocks.

What stocks did you pick this Diwali? What was the thought process that you put onto before selecting a particular stock? Share your views in the Club or share your comments here.

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10 Responses to "How Trend Channels helped me pick stocks this Diwali"
Gopal S Agrawal
19 Jan, 2015
@ Sudhakar We have to have filters for it. First and foremost can be stocks with good volumes and sufficiently liquid. Also as this stocks are in up or down trend we can have stocks making monthly gain or loss of say 10 %, 20 % etc to give us a set of stocks out of the smaller universe that we have formed based on volume and liquidityLike 
Apurva Sheth
06 Jan, 2015
@ paresh These are log charts. You can check this article 'This common charting error can cost you dearly' for my preferences on the same.Like 
Apurva Sheth
06 Jan, 2015
@ paresh & sudhakar One can limit the number of stock charts you see by using screeners with set parameters. Simplest of them would be to look at stocks that are trading above 200 DMA. However I prefer scanning them manually. To start with you can do a manual scan over select few group of stocks which may include your portfolio, watchlist and then all the stocks in an index like CNX 100/200/500. If checking all the stocks on a day is not possible then you may divide the list equally on each day. For Example. If your universe is CNX 100 then you can study 15 stock charts every day for a week so that you can complete studying the entire universe by end of 7th day. Like 
Apurva Sheth
05 Jan, 2015
@ nimish you can refer to the previous letters in the archive section. Like 
Sudhakar
04 Jan, 2015
Apurva, Thanks for the explanation. It really helped in understanding one of the primarily characteristic we should look at to short list good stocks. Can you please explain with some example how to identify such stocks in a strong uptrend or downtrend from a list of hundreds, even thousands of stocks in the market? It would be of great help! Thank you in advance!!Like 
paresh shah
04 Jan, 2015
A further question - It appears that the charts you are using are log charts. Please confirm the same - where do we get these charts and should one use normal or log charts for our analysis ?Like (1)
paresh shah
04 Jan, 2015
Hi Two questions of a practical nature ? You based your search based on weekly charts. Are the charts in Equitymaster weekly charts. Where else can we get weekly charts ? How do you select which charts to see - is there a way of limiting the search ? Like 
Raviraj
04 Jan, 2015
Interesting article. I mainly check the trend before selecting any stock and the Market direction as well as usually 3 out of 4 stocks usually follow the Market direction.Like 
jamil ahmed
04 Jan, 2015
pls arrange 5 stock to make huge profit in 5 to 7 monthLike (1)
nimish savla
03 Jan, 2015
For new subscribers like me, is there any possibility to study / read previous letters / reports written by you ?Like 
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