In my introduction blog, I spoke about using Technical Analysis and High Probability Setups for entry in quality stocks with good fundamentals. Recently, I listened to Nooresh Merani’s talk in IIC (https://indianinvestingconclave.com/recordings_itc/71?event_id=18) about Double and Multiple Bottoms in Nifty and how rewarding those setups have been. Thought I will write about one of the high probability setups that I use in picking such bottoms or reversals for my long term portfolio.
52 week Low Darvas Box
The credit goes to professor Venkatesh (http://naveraconsulting.com/aboutus.html) who taught me this setup in college. The only necessary condition that he asked us to ensure before looking for such setups is : “The market should be bullish, i.e, in an uptrend. Or atleast bottomed out (made a higher low).” Let me illustrate it with a trade I am holding in one of my favourite stocks, Tata Motors. TaMo is the reason I found this setup. I used to work for Tata Steel. The reason I am biased towards Tata Group stocks. I hold – Tata Steel, Tata Motors, Tata Global, Rallis (all 4 were picked using this setup), Trent and Tata Elxsi. I started buying TaMo when it fell from 400 to 280 – 300 levels thinking thats the bottom. Stock fell to 250. I averaged down (DUH, I am a retail investor) and finally gave up at 240 levels (proud of myself!). I was talking to my professor about this loss which is when he taught me this setup to pick the bottoms. Finally, I bought TaMo at 140 and avoided buying falling knives like Yes Bank or DHFL.
So what is the 52w Low Darvas Box? A stock makes a 52w Low (A), bulls try to push the price back up making a swing high (B) in the process. The bears haven’t given up yet. They pull the price back to the 52w Low or atleast closer to it. The reversal is so strong that the bulls do not let price make a new low. They start buying and the price prints a higher low (C). This is where my setup differs from Nooresh’s. His setup can have a perfect double bottom or even a shakeout with a tolerance of 1 – 2 %. For my setup, the stock HAS to make a Higher Low which indicates Strength in the price action. It shouldn’t even test the previous low, let alone break it even intraday.
Entry on Daily Close above Swing High (B) either on same day Close or next day Open. (Close should be atleast 1 or 2 Rs. above the Swing High (B))
Possible scenarios for Exit:
- Initial stoploss is the Higher Low (C). Position size based on the difference between the Swing High and Higher Low (B-C).
- Move the stop to cost once price moves in your direction to protect Capital
- Trail your stoploss to protect Gains
As Zafar Shaik would like to call it, ABC or the 123 pattern!
It worked beautifully in Tata Motors. The market had bottomed out on February 19th. I took the trade on 3rd April. I booked 10% profits as the price took out my trailing stop. It was almost a vertical move of 20% in 10 days! I was a bit aggressive. The 2nd trade was on 18th October. The market had bottomed out on 20th September after Sita ma tax cuts. I still hold the position with the trailing stop at 180. A neat 30% !(considering the trailing stop price)
Tata Global – I love my coffee!
Another favourite holding of mine – Ramco Cements ( I am from Tamil Nadu. I buy some regional stocks for long term portfolio.)
I tried to look for this setup in the worst places possible. How did this setup perform in wealth destroyers like Yes Bank and DHFL?
Zero trades in both Yes Bank and DHFL. Please let me know if you check for this setup in other destroyers.
Some of the other trades that I have taken and posted in twitter:
- Castrol India – Entry 130, Low after entry – 121, High – 160, Trailing Exit – 143 (https://twitter.com/langvalcapital/status/1172239061118898176)
- APLLTD – Entry 570, Low after entry – 531, High & CMP – 600 (https://twitter.com/langvalcapital/status/1190766671058747393)
- LUMAXTECH – Entry 100, Low after entry – 91.5, High – 122, CMP – 115 (https://twitter.com/langvalcapital/status/1199055169159233536)
- RALLIS – Entry 170, Low after entry – 158, High – 227, CMP – 220 (https://twitter.com/langvalcapital/status/1172234677068812289)
- KPRMILL – Entry 650, Low after entry – 642, High – 714, CMP – 672 (https://twitter.com/langvalcapital/status/1188122495724875778)
- Sudarshan Chemicals – Entry – 400, Low – 382, High – 478, CMP – 469 (https://twitter.com/langvalcapital/status/1187805121075302400)
- RAIN – Entry – 119, Low – 113.5, High – 129, CMP – 124.5 (https://twitter.com/langvalcapital/status/1215883647791718400)
- ERIS – Entry – 460, Low – 432, High – 518, CMP – 506 (https://twitter.com/langvalcapital/status/1208710355624423424)
Some observations from my experience of trading and seeing this setup in charts:
- A really good entry strategy for your long term portfolio watchlist stocks which you will hold for years and are beaten down in the recent past.
- Works well when broader market is bullish. February 2019 Nifty bottomed out (higher low) and very soon Ramco gave a good entry with gap up. September 2019 Nifty bottomed out and Tata Motors gave a good entry. Small and Mid caps bottomed out recently and have given good trades. Look for stocks which are breaking out as soon as broader indices turn bullish.
- Choose stocks where the difference between Swing High and Higher Low ,i.e, B and C of the ABC pattern, is less so that you get a good risk reward trade. Position size based on this stoploss.
- One can use aggressive stop loss with re-entry as well. When the stock doesn’t immediately move in your direction, exit when stock closes below B and enter again when stock closes above B. The reason for my exit in 1st trade in Ramco. It never traded above B for more than 3 days.
- One can try to optimise the entry. Take the trade on the same day the stock is closing above the Swing High B because there might be a gap up the next day and you will end up paying a bit more. Take half your original position if the closing is a bit far from the Swing High B. Take the remaining position on any pull back or retest of B.
- Year long consolidation setups are too good. Check the charts of KPRMILL and SUDARSCHEM. The Daily Close above the Swing High was actually a new 52w High giving a high probability entry!
All my 10 trades have been / are profitable. I know 10 is a very small number and I may have been lucky. A Statistics nerd would want atleast 30 trades or someone like my Guru – Madan would recommend atleast 10 years of back testing. I haven’t backtested this strategy as I haven’t quantified the rules to make it a mechanical system. To be honest, I don’t know how to convert this system in to a mechanical one with proper entry and exit rules. But one can always do the manual backtesting by looking at charts one by one and checking the results. So before you even think of putting on a trade based on this setup, please do your own back test and form YOUR set of rules to build conviction. I can only give the idea. You have to build the system. By system I mean – Rules for Entry and Exit, Position Sizing, Risk and Money Management.
Happy bottom fishing!
Disclaimer – I am in no way responsible for your trades or losses. I am not a SEBI registered advisor. Please do your own research. I may hold all or some of the stocks mentioned in this blog. No stock mentioned in this blog is a recommendation. The blog was written for educational purpose.