Bharti - A Technical Look - 31 May 2009

The week that has just gone by saw a lot of news flow regarding Bharti Enterprises - particularly the renewed Bharti MTN deal. Many analysts - the fundamental analysts in particular - were preoccupied with unraveling many complex aspects of the deal such as the the financial aspect, the regulatory aspect etc.

Let us instead look at the daily price action. See the chart of Bharti (you can click on the chart to get a larger view which will be shown in a new window) . Since the news broke, the market reacted negatively for three days, and then pulled itself up in the next two days ( these two days were also days when the market went up a lot). Now the thing to notice is that the script has bounced off its support at 750 and is now poised to break through the green rectangle.

It is clear that the trend has been up. So, we accept that the trend is up and treat the most recent price action as a correction. Therefore we should look and get ready for a buy set up. This view is supported by the slow stochastic about to come out above 20 and the RSI beginning to stay above 50. Here are some specific suggestions:


1. For Aggressive traders: buy between 820 and 750, with SL at 720.

2. For Traders with moderate risk appetite: buy when Bharti closes above 875 on a daily closing basis. SL at 750.

Once the trade is taken, trailing stop loss should be employed to protect gains if and when the trade becomes profitable.

A Dangerous Temptation

Personally speaking, some days during day trading I have this incredible urge to make a trade in the opposite direction of the trend. The thinking ( or the emotion) behind this goes like this: The market has gone up say 150 points already; how much higher can it go? So, you short the market with a very tight stop loss ( very tight because your know that if the highest point is taken out, it can go much higher). Alas, your stock loss is hit, but the market does not go zooming higher immediately, and it retraces a bit. So you think that your decision to short was right but the timing was a bit early. So you do it again. And again the trade is a loss!


Here are the actual trades - ALL SHORT sales - from May 29 ( taking into account 3pts for commission per trade) :

Bought	Sold		Profit	Loss
4453.9	4449.1			(8)
4481.85	4477			(8)
4489	4485.5			(6)
4483.35	4484.1			(2)
4467.4	4481.1		11

Notice the last trade was profitable. And it had the potential to make more money. But I closed it a bit early. Why? Because I was afraid to lose money again after four losses.

Actually, I estimate that the probability of profits from such trades ( going against a main trend ) is perhaps 1 in 20. In other words, you can lose 190 points in 19 trades ( assume that average loss is 10 points)., and you gain may be 50 points in ONE winning trade. Net loss 140 points!!!!

What is the moral? Trading against a major trend is dangerous. It is very tempting, but the temptation is likely to lead to heavy loss on that day.