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Many trend-following trading systems use breakouts or breakdowns as a primary trading signal. It could be a 20-session high (low) or a 55-session high (low) for example, that is seen a potential buy (sell) signal. Most systems use filters as well. Some look at volumes, others see if the move is aligned to the overall market trend, while yet others use moving average confirmations, etc.
The most powerful breakout signals are life-time highs or lows, or 52-week highs or lows. The long-term nature of the signal makes it more likely to be valid and more likely to lead to a persistent trend of long duration and large magnitude. If several stocks in the same sector have trending moves in the same direction, the signals are more likely to be valid.
The current market situation shows some interesting signal divergences. Major indices like the Nifty are only five to six per cent down from their 52-week highs. However, mid-caps and small-caps have collapsed. A large number of large-cap stocks have also hit 52-week lows. A 52-week low in a large-cap can be shorted efficiently by selling the stock futures and any 52-week high can be exploited by buying equity against delivery, even if the stock is unavailable in the derivatives segment.
Three sectors look especially interesting. IT has seen quite a few upside breakouts in the recent past. HCL Tech, TCS, Infosys, MindTree and Tech Mahindra have all hit 52-week highs recently. The sector appears to be bullish. The history of the IT sector also shows that it is a useful counter-cyclical hedge against domestic bear markets. So, it is among the sector least likely to be affected by a continuation of the trend of the past week where the Nifty has fallen due to political uncertainty.
The other two sectors that look interesting are real estate and metals. Metals have seen a huge number of large stocks hitting 52-week lows recently. Sail, Hindalco, Tata Steel and Sesa Goa are all listed in the derivatives segment. So are Jindal Steel & Power and Welspun Corp. The global and domestic scenarios suggest the downtrend could continue. The shorts look especially attractive since commodity cycle trends can persist for very long durations.
Real estate has also seen a sell off with every major company seeing a decline in share prices. HDIL is the only one that's hit a new 52-week low but many others have hit three-month lows in the recent past. The sector offers several attractive shorts on the basis of the recent high-volume breakdowns. Stocks listed in the derivatives segment include DLF, Unitech, Indiabulls Real Estate and HDIL. Results until Q3 and anecdotal evidences suggest that the sector is suffering from a toxic combination of low demand, stalled projects, cash crunch and unsold inventory.
The most powerful breakout signals are life-time highs or lows, or 52-week highs or lows. The long-term nature of the signal makes it more likely to be valid and more likely to lead to a persistent trend of long duration and large magnitude. If several stocks in the same sector have trending moves in the same direction, the signals are more likely to be valid.
The current market situation shows some interesting signal divergences. Major indices like the Nifty are only five to six per cent down from their 52-week highs. However, mid-caps and small-caps have collapsed. A large number of large-cap stocks have also hit 52-week lows. A 52-week low in a large-cap can be shorted efficiently by selling the stock futures and any 52-week high can be exploited by buying equity against delivery, even if the stock is unavailable in the derivatives segment.
Three sectors look especially interesting. IT has seen quite a few upside breakouts in the recent past. HCL Tech, TCS, Infosys, MindTree and Tech Mahindra have all hit 52-week highs recently. The sector appears to be bullish. The history of the IT sector also shows that it is a useful counter-cyclical hedge against domestic bear markets. So, it is among the sector least likely to be affected by a continuation of the trend of the past week where the Nifty has fallen due to political uncertainty.
The other two sectors that look interesting are real estate and metals. Metals have seen a huge number of large stocks hitting 52-week lows recently. Sail, Hindalco, Tata Steel and Sesa Goa are all listed in the derivatives segment. So are Jindal Steel & Power and Welspun Corp. The global and domestic scenarios suggest the downtrend could continue. The shorts look especially attractive since commodity cycle trends can persist for very long durations.
Real estate has also seen a sell off with every major company seeing a decline in share prices. HDIL is the only one that's hit a new 52-week low but many others have hit three-month lows in the recent past. The sector offers several attractive shorts on the basis of the recent high-volume breakdowns. Stocks listed in the derivatives segment include DLF, Unitech, Indiabulls Real Estate and HDIL. Results until Q3 and anecdotal evidences suggest that the sector is suffering from a toxic combination of low demand, stalled projects, cash crunch and unsold inventory.
The author is a technical and equity analyst
