Last week, we discussed about the basic characteristic of an uptrend where the price would make a series of higher highs and higher lows with pull backs to the moving average. This sequence plays out across multiple time frames and in Relative Strength Chart too.
Depending on the phase of the market and your trading style, you can easily build scanners to identify either pull back to moving average candidates in the bigger time frame or if you wish to participate in the trend early on, then focus on candidates where the trend reversal is happening in the bigger time frame or 3% brick size.
In the current market scenario where mid and small cap stocks are still ruling strong, you may not find too many candidates where there is a bullish trend reversal. Just to clarify, a bullish trend reversal would be captured by:
- Crossover of short-term moving average above the long-term moving average
- Price trading above the two moving averages
When the moving average crossover happens in bigger time frame, say 3% brick size, then it indicates the possibility of a reversal of the prior downtrend and the start of a fresh uptrend. Let us take the Bajaj Finance example again.
The bullish trend reversal is highlighted in the chart above and this plays out again in the same sequence in multiple time frames. Considering that markets are generally strong now, except for Nifty 50 which is in a consolidation, you may not find too many bullish reversal candidates in 3% brick size.
A logical approach would be to scan for the same pattern in the lower brick size of say 1% or even 0.5%. When the price gets into a shallow retracement, it may not be captured in bigger brick size but in smaller brick size, the price may have dipped below the moving averages and may have since turned around.
Here are a few stocks where a positive trend reversal has happened in 1% brick size.
The chart of APLLTD is displayed below for reference.
You can also take a look at the 3% chart of these candidates and you will find that most of them have pulled back to the MA and turned around. This multi time frame analysis can be an effective way to participate in strong trending stocks that are in a temporary pull back.
You can also design a scanner to identify candidates which have pulled back to the moving average and then turned around in 1% brick size. This can again throw up interesting candidates to participate in trend continuation.
Featured below is the chart of Hindcopper which has been in a strong uptrend for several months. The price has recently corrected and pull back to the MA in 3% brick size. In the 1% brick size chart displayed below, the pull back to MA in 3% brick size comes across as a mini-trend reversal and then the uptrend has resumed recently.
Notice how the price is now trading well above the moving averages and there is a positive moving average crossover too. This indicates that the prior correction may be over and a positive trend reversal has happened.
The same sequence plays out in the Relative Strength (RS) chart too. Let us look at the RS chart of Nifty Metal and Nifty 50 index.
The RS chart pulled back to moving average in January 2021 and has since resumed the uptrend, indicating that the metal index resumed its outperformance since end January 2021. Since that turnaround, the Nifty Metal index has appreciated by about 50% in just about couple of months. Few metals stocks have rallied by over 100% during this phase.
The message here is that price behaves almost in a similar way across multiple time frames, especially when it is in a strong trend. The pull back to moving average and resumption of uptrend is a typical feature.
You can use this basic idea to identify stocks and participate in strong trends. The system matrix feature in TradePoint is immensely helpful in this regard. You can run a scanner to identify pull back to MA candidates in 3% brick size and positive crossover of MA in 1% brick size. This could be an interesting combo to be used in System matrix. Try it out.