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How to Identify Stocks From Turnaround Sectors & Index
  • : December 1, 2020
  • : Raju Ranjan

How to Identify Stocks From Turnaround Sectors & Index

We often talk about or at least heard about buy the dips in a lower time frame while the stock is in an uptrend in the higher time frame. But many of us are not exactly sure about how to go about it. This approach would make a lot more sense when you are looking at a sector that is just turning around and showing signs of trend reversal. A classic example would be small cap or mid cap sector or say an automobile or pharma sector.

The question we wish to address in this article is how to go about identifying candidates across multiple time frames in the above scenario. I will share the approach that I find interesting and you can design something similar or entirely different based on your likes and preference. Again, there is no right or wrong method and feel free to experiment.

When I suspect a sector or index to be turning around, I will start off with a follow through buy signal in higher time-frame or 3% box size. The logic behind this scanner is to ensure that there is some bullishness in the higher degree time frame.

So, if you run this scanner in 3% in the small cap and mid cap index, you will get stocks that have displayed strength in higher time frame. This would ensure that you focus on strong stocks. Remember most of these stocks could have been in a correction or downtrend as the index was not doing well until recently. If you get a follow through buy signal in stocks from such index, it would be a big event to take note of.

You can save the stocks from this scanner to a group and run a P&F Matrix for the stocks in that group. The output is featured below.

You can choose the stocks where the score is either 0 or 1 in 0.25% and the double top buy level is also featured in the above table. You can choose the stocks from this table and initiate the trade thereafter.

What is key is understanding the logic here. The same logic may not be applicable in other situations. We are looking at a special situation where we are trying to identify candidates from a turnaround scenario.

We will talk about breakout vs retracement trades next week.