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The mood of the Indian markets is quite positive on Monday. Most of the sectoral indices are trading in the green and surged to an all-time high of 44,458.95 by 9:46 AM IST. While it may not seem ideal to find short opportunities in such a bullish environment, contra bets can sometimes generate decent profits.
One counter that opened with a massive gap up and currently trading around 12% up at INR 1,231 is ICICI Lombard General Insurance Company Limited (NS:). The stock witnessed a buying frenzy at the opening tick after ICICI Bank (NS:) agreed to increase its stake in the general insurance arm. But why it can be a shot candidate?
Image Description: Daily chart of ICICIGI with volume bars at the bottom
Image Source: Investing.com
Firstly, there has been a massive gap being created on the chart. Generally, gaps are filled by the stock sooner or later, which makes them a good candidate for a contra bet (although not all gaps are filled). The second reason is the overbought status of the stock as depicted by the RSI (daily, 14) which is currently showing a reading of 76, comfortably above the benchmark reading of 70.
The confluence of a big gap coupled with the overbought status of the stock is the premise behind the short trade on this bullish move. But obviously, going against the trend is definitely a risky strategy therefore traders with a low-risk appetite or less experience should steer clear from fading any such rally.
Currently, the stock is trading at INR 1,231, almost 12% up from the previous closing. However, it has also retraced noticeably from the day’s high of INR 1,253. Before thinking of fading this rally, traders need to make sure that profit booking has started to take place. For this, the RSI falling below 70 could be a good signal. As long as it is hovering above 70, no short-selling opportunity should be explored.
Another signal could be a fall below today’s low (in the subsequent trading session). If tomorrow the stock breaks the low made in today’s session, even that can be deemed as a signal of increased selling pressure. Either of the above signals should be there before taking the contra bet.
Now coming to risk management, if the stock rallies above the day’s high, that would signal the continuation of the bullish move, hence holding on to short positions thereafter might not be a good idea. Short positions can be booked around INR 1,155 (spot) which can act as a support level.
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