Reduce. Reuse. Recycle.

Apurva Sheth
I know most of you must be already startled after reading the headline. You are probably thinking, what this has got to do with technicals.

Rest Assured. I have aptly put it where it should be as today's topic is very much related to this.

International Recycling Symbol
Source: Wikipedia
But before I move on to today's topic let's talk about these three words. Reduce - is using natural resources wisely, and using less than usual in order to avoid waste. Reuse - is to use an item again after it has been used. Recycle - is a process to change waste materials into new products to prevent waste of potentially useful materials. All of these three components are equally important to eliminate waste and protect environment.

The component that we are going to talk about today is Reuse. An item can be used again for the same function or in a new-life form where it can used for a different function. The same concept applies to trendline, supports and resistance.

I spoke to you about trendlines in one of my earlier articles. Click here to read it in case you missed. Here I told you about two types of trendline. An uptrend line which can be drawn by joining series of ascending bottoms in a rising market by a straight line. A downtrend line can be drawn by joining the tops of a descending series of rally peaks.

Trendlines as Supports and Resistance
Source: Profit Hunter

After drawing trendlines from two points the trendline should touch and bounce back from a third point to be considered valid. When prices bounce back from fourth or fifth point of this trendline, it is considered that the uptrend line is lending support or in case of downtrend line it is lending resistance to price.

Using uptrend lines for support and downtrend line for resistance is like Re-using them again and again for same function.

As it is bound to happen prices will breach these trendline one day or the other. When that happens people generally discard these trendlines. I suggest we should apply the concept of reuse in a new-life form for trendlines. The same trendlines which acted as supports may now act as resistance and vice-versa. Thus the same trendline can be Re-used for a different function.

Same trendlines used for different function
Source: Profit Hunter

This concept applies equally on stocks that are trading in horizontal ranges as well. In technical analysis terms this concept is known as 'Change of Polarity Principle'.

Previous Supports now becomes Resistance
Source: Profit Hunter

Supports or Resistance lines drawn on stocks that are trading in a range are nothing but horizontal trendlines. So, the same concept applies in both the cases. Previous supports can become resistance and previous resistance can also become support.

Now I will show you how this concept can be applied in markets.

Cipla Ltd.
Source: Spider Software India

Cipla Ltd. topped out just below 370 in December 2009, it revisited this level in December 2010 but couldn't cross it. It fell short once again in February 2012. By September 2012 it closed at a new high but consolidated for a couple of months before making a meaningful move upwards.

After topping out in January 2013 at 435 it headed southwards, this fall halted around previous resistance level of 370. This happened for four times in succession. The stock rebounded from same level in June 2013, December 2013, February 2014 and May 2014 before breaking out above the previous high of 450.

ACC Ltd.
Source: Spider Software India

ACC Ltd. hit a high of around 1120 in November 2010. This level acted as resistance in April 2011. It broke out above this resistance and touched a high of 1230 in October 2011. The correction from this top found support at 1120 from November 2011 to January 2012. Subsequent corrections in June 2012 and April 2013 also found support at 1120.

Also notice the trendline drawn at 950 levels which acted as support from October 2010 to July 2011. The same trendline lent support later in August 2013 and January 2014.

The stock hit a life time high of 1545 in October 2012. Recently the stock reversed direction from similar levels a couple of times.

Lupin Ltd.
Source: Spider Software India

Lupin Ltd. is on a tear for quite a long time. I began by drawing a resistance line from February 2011 peak. This line acted as resistance until May 2013 when the stock closed above this line. Later on the same trendline lent support during an uptrend. The stock found support at this trendline and rebounded after witnessing corrections in August 2013, January 2014 & May 2014. I have drawn a parallel lines above this trendline. The topmost line is from December 2010 high. And the lower one is from January 2010 low. These channel lines will act as reference to analyse the stock in future.

Reduce, Reuse & Recycle can these concept of environmental protection be applied in stock picking? Share your views in the Club or share your comments here.

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2 Responses to "Reduce. Reuse. Recycle."
rajesh
12 Mar, 2015
hello sir , i have one doubt about using stoploss . let suppose i have bought 55 shres of dabur . now in order to protect this as recommended by you we should place a stop loss order . as usual our order gets cancelled at the closing time of the market . So my question is should we place a stoploss order on the daily basis. I am new to the trading and m your member in swing trader . please help me or give me any helpline number .Like (1)
Badri
17 Jan, 2015
Very good article with wonderful diagrams that make the reader understand the concept even without reading the description.Like 
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