How SCOREFASTTM Generated 61% Returns in Two Months

Apurva Sheth

Yesterday, I wrote to you about the secret project I've been working for more than a year. This work has culminated in what I call the SCOREFASTTM system.

SCOREFASTTM uses nine indicators to identify stocks on the cusp of a long-term reversal...from down to up. The main advantage of getting into these stocks is the limited risk. The downside risk is smaller with already beaten down stocks. But the upside potential is huge, as the uptrend can last for months...even years...and the rewards can be very big.

I covered the nine SCOREFASTTM indicators yesterday. Today, I will show you how SCOREFASTTM could have generated 61% returns in two months.

SCOREFASTTM in Action...

Huge IPOs and Market Tops 

The stock we are looking at is Punjab National Bank. The SCOREFASTTM indicators gave an entry signal on 25 May 2016 at 74. Let's look at PNB through the lens of each indicator.

  1. Stretch Indicator: The stretch indicator tells us how far (in percentage terms) a stock is from its 200-day moving average (DMA). Stocks that deviate from their mean tend to revert to the mean.

    I've plotted the stretch indicator in the lowermost panel. The indicator hit an all-time low of -45% in February 2016, which means stock was trading 45% below its 200 DMA. The indicator recovered marginally by May, but it was still near the lows, which means the probability of the stock bouncing back towards it long-term average was high.

  2. Crash or %Drop: The crash indicator tells us how much (in percentage terms) a stock has crashed from its highs. Stocks that have crashed more than 30% are more inclined to move up again.

    PNB topped out at 231 in December 2014 and crashed to a low of 69 by February 2016. This was a drop of 70%, more than double our minimum requirement of 30%.

  3. Oscillators: Oscillator indicators like Relative Strength Index (RSI), Moving Average Convergence and Divergence (MACD), and Rate of Change (ROC) help identify a shift in momentum from down to up.

    Each of these momentum indicators were in a deep oversold zone between February and May. The 14 day RSI had already hit an all-time low of 11.32 in January 2016. But it didn't follow suit in May. It formed a higher low of 28 in May 2016. This was a clear sign of bullish divergence and an early indication of change in momentum from down to up.

  4. Reversal Patterns: A break out from reversal patterns such as an inverse head and shoulder, double bottom, rounding bottom, and rectangle patterns often confirms a reversal of trend from down to up.

    PNB touched a low of 69 in February 2016. It retested this low in May after a pullback. The possibility of a double bottom or 'W' pattern formation was strong.

  5. Entry/Exit: We recommend a stock only after it has witnessed a sharp fall and has limited downside. And we exit a stock only when the up move has exhausted.

    The stock was trading near its 52-week lows and its lowest level since March 2009.

  6. Fibonacci Retracement: Retracement levels are specific intervals or percentages such as 38.2%, 50%, 61.8%, and 78.6% of the previous move, around which the stocks tend to find support or resistance. We look at price action around these levels to identify an opportunity.

    PNB was trading above the crucial Fibonacci retracement level of 78.6%. This level is considered an extreme point from which bulls could snap back in action.

  7. Stock Cycle (Accumulation): The price of every stock moves in a repeating four-phase cycle: Downtrend-Accumulation-Uptrend-Distribution. We look for stocks that are in the accumulation phase and are ready to move into the uptrend phase.

    PNB was moving rhythmically from one phase to another. I marked all the phases on the chart since August 2013. The downtrend phase started in December 2014. The stock moved into the accumulation phase in February 2016.

  8. Support and Resistance: Previous highs and lows act as supports for stocks. We look for stocks trading near multi-month support levels.

    All the major bottoms were made in the range of 60 to 75. The probability the stock would bottom out around these levels during the ongoing bear market was high.

  9. Time: Stock prices tend to stay in a range for a while before they can move further up. Once the stock has spent enough time consolidating gains, we can enter for the big upside.

    PNB topped out at 231 on 19 December 2014 and bottomed out at 69 on 24 February 2016. This means the downtrend lasted for 432 days (14 months). Most bear markets last anywhere between nine and fourteen months under normal circumstances. We'd already seen a price correction of 70% from the highs and were at the end of a time correction as well. Thus, from a long-term perspective, the stock was ripe for reversal.

With PNB, all nine SCOREFASTTM indicators signaled a reversal was around the corner. And it was. The stock zoomed off just days after the system gave us the signal.

Now, it's important to note that a system can easily identify a reversal, but no system in the world can tell you how long the uptrend will last.

So the best way to benefit after identifying a long-term reversal is by using a trailing stoploss and holding the stock as long as it stays above the trailing stoploss. This is what world-renowned trend followers do: cut their losses short and let their profits run.

It's what we do as well. We applied a 10% trailing stoploss to PNB. It was triggered on 22 July 2016. We marked the exit price at 119.45 (the opening price on the next trading day). This was 61% above the entry price of 74.

That's how the SCOREFASTTM system can identify stocks on the cusp of a long-term reversal. If you want to benefit from this system, you have two options: One, learn the system yourself and apply it. Or allow me do all the work and send you stock recommendations based on this system.

If you're considering the second option, then I have good news for you. I just launched a new trading service based on the SCOREFASTTM system.

It's called Peak Profit Alert, and you can know more about it here.


Market Notes

Flood of IPO's Signals Warning Ahead!

It's raining initial public offerings (IPOs) all over the world. Global stock markets are rising strongly, and unlisted companies want to grab the bull by the horns. It is easier for them to raise funds when the market is willing to pay any premium for their shares.

Saudi Aramco is set to come out with a US$100 billion IPO, breaking Alibaba's previous world record of US$25 billion. And the Indian share market has half a dozen IPOs in the pipeline for the next two months. They are set to raise over Rs 10,000 crores.

This is a warning sign for the markets; huge IPOs near market tops do not bode well for the bulls.

Huge IPOs and Market Tops

Huge IPOs and Market Tops 

The above chart plots the biggest IPOs in Indian history and the percentage drop to the Nifty Index after their listing. The correlation between huge IPOs and Nifty corrections is clear. Almost every Nifty peak came with a big IPO listing.

India's largest IPO, Coal India Ltd, was listed on 4 November 2010. The Nifty corrected 28% starting the very next day. After the Reliance Power IPO hit the market in January 2008, the Index corrected 60%. ONGC's IPO came just before a 26% correction to the index. And the list goes on...

Why do you think this happens?

It could be various reasons. Here are a few...

In a bull market, like the one we are in now, investors don't seem to care about business fundamentals at all.

What do they care about?

Two words: listing gains.

Yes, that's right. Even if the business is terrible...even if the IPO is priced insanely...investors still flock, hoping to make a quick buck. Some even borrow money to get a piece of the action.

Another reason might be liquidity. Huge IPOs suck up investor liquidity, and markets fall due to lack of liquidity.

But this is not always the case.

Sometimes, we see the index rally after huge IPOs. A 44% gain followed the DLF IPO, while the NHPC IPO ushered in 36% gains.

And, of course, markets can top out without a huge IPO. The March 2015 Nifty top wasn't associated with any big IPO.

But right now, we have huge IPOs lined up for the next two months. The NSE Ltd IPO has an issue size of Rs 10,000 crores. Avenue Supermart, Central Depository Services, and Music Broadcast will also list soon.

By the way, the Nifty is trading at its 52-week high.

Will these IPOs bring a correction to the Nifty as Coal India and Reliance Power did? In any case, bulls should tighten their seat belts.

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