Intraday trading.

Lakshman wants to buy Auro Pharma while Srinivas asks if VIP Inds justifies a buy after its severe decline.

All of us love a bargain. If a product worth Rs 100 is available for Rs 50 then surely we will try to buy it. Therefore, when a share falls from 560 to 280, we tell ourselves – here is a share available at half the price – surely it is a bargain, let us buy it for the ‘long term’. Please continues reading, since this is a real life example. After we buy the share at 280 we wait for the ‘long term’. Then, in Nov 2011, the share price falls to 29. Yes, twenty nine. The share I just described is Bajaj Hindustan. The company makes Sugar. It is respected in the business, so it is not a scam. But, share prices have their own logic.

When share prices are falling rapidly, there is a strong desire to buy the share since ‘it cannot go down much more’. As buyers have realized, share prices can, and, do go down lower than we imagine.

When we try to buy in a falling market, we are trying to catch falling knives. If we catch the knife, we will own the knife, but if we get hurt while catching the knife, we may be in deep trouble. So, why try to do so?

The only reason to catch falling knives in the market is: inside knowledge. If you have in depth knowledge of the business, then you have some kind of inside knowledge. But if you are basing your decisions on information based on TV, Newspapers etc.. then you have no edge over the people who are selling the stock. What makes us feel that we are wiser than those who are selling now?

Sometimes, prices fall, then suddenly reverse and rally sharply. This is called a V reversal. Such reversals are unpredictable. Traders should not try to catch these sudden, violent moves. Trades that emerge from accumulation or distribution are much easier to manage.

Srinivas asks:
Which time frame graph is suitable for intraday as well as positional trades for index and specific stocks?

My Notes: For Intrday trading, 5 minute or 15 minute charts should be suitable. For positional trades, the end of day chart should be used.

Sudhin asks:

Is Tata Steel forming a H/S pattern with a probable target of 280?
Also where could I get the historical PE for individual stocks.

My Notes: I could not determine such a pattern. Tata Steel is at lts lows while a head and shoulder pattern is ideally made at an intermediate top. To me, it was easier to identify a trading range for tata Steel between 400 and 500. A breakdown below 400 will suggest pattern targets of 300.

amarjeet says:
please explain why u r bullish on hind uniliver .because now it makes domed house chart pattern.i am bearish on.

My Notes: HindUnilever is making life time highs. That’s bullish for me. I turned bullish when it crossed 300 which took the price into unchartered area. It will certainly have corrections and dips, but the long term trend has just turned up, may, have more upside.

Sudhin on Inflation and Stock prices
My Notes: please read the comments by Sudhin on link between inflation and stock prices. I hope readers will be able to answer his question through their comments.

Rohit on Nifty breakdown:
Does that indicate that we will make new lows? if yes then will the decline be fast and furious?

My Notes:
Yes, my sense is that the Nifty will make new lows for the currernt bear market. Fast and Furious? Cannot say.