This banking stock has gone up by 20% in the last six months

Published May 06, 2019

The Trend is by far the most important indicator in the stock market. Rising trends indicate that the company or the market is experiencing positive development and that buy interest among investors is increasing.

According to the theory of technical analysis, 'Trend is your best friend'. And being an analyst and trader for many years now, I wholeheartedly support this statement.  Always go with the flow- has almost always proven to be the best strategy in trading. However, one must not follow things blindly and must always validate that what is said and suggested is correct or not, or if it really applies to one in all respect and time frames.

Saying this, an investor or trader must know his or her objectives, what is their time horizon, how much capital to invest and most importantly your capacity to withstand drawdowns/losses in case of a trend reversal.

To validate past actions and the theory itself, Investtech did some research into the Indian stock market. We have studied stocks in rising and falling trend channels in Investtech's medium term price charts. The target of the research was to examine how stocks have actually performed when they entered into a trend channel.

The universe taken here is all stocks that were listed on NSE during the period 2007 and 2018. Results show that stocks with buy signal from rising trend on average have risen by 5.2 % in three months while index went up by 3.1 %. In other words the annualized excess return was 9.1 percentage points. For stocks that gave a sell signal (stocks in falling trend channel), absolute return for next three months was 0.2 %  and annualized excess return was -12.3 percentage points. These numbers clearly indicates that stocks in rising trend outperformed the underlying Nifty 50 index, while stocks in falling trend channel underperformed the index. The entire report can be studied here.

To elaborate on the subject we are doing a webinar on Tuesday, May 07 at 01.30 PM. We will take you through the research in details and show you examples on how being invested in the right direction has given good returns. Below is one such example.

Kotak Mahindra Bank Li (KOTAKBANK.NS) Close: 1417.80

The analyses are based on closing price as per May 3, 2019. Maintaining proper stop loss is always recommended.