One of the most difficult trades to follow ~ Turnaround Breakout with Multiple resistances on the upside.
When a stock breaks out above a well defined Line of Resistance, way below all-time highs with lots of little resistances even above that breakout line, it’s called turnaround breakout [Breakout with lots of hurdles 🙁 ]. It’s different than breakout to new highs, as it has multiple walls of resistances to climb even after the breakout. The process of turnaround can be very slow and painful.
State of Dr. Reddy stock on Jan 15, 2020
Source: Chartalert.com
As you can see in the chart above, Dr Reddy stock was all set to clear Line of Resistance near 2970 but with multiple resistances on the upside marked as R1, R2, R3. What does it mean? It means even if the stock breaks one line of Resistance like R0, it would have to encounter multiple resistances on the upside at R1, R2, R3, R4. The good part: When a stock turns bullish, it usually is more inclined to breaking past the resistance. The worst part you never know which of these resistances might become difficult to deal with.
Dr Reddy Turnaround Breakout Trade Initiated on Jan 17 2020. This was the state of the stock back then
source: Chartalert.com
Here’s the progress on the stock since then
As you can see in the chart below, Dr Reddy stock over the last one month, first broke past R0 i.e. 2970 and then rallied to R1…stalled there and pulled back and now has cleared R1 and heading towards R2.
Source: Chartalert.com
Dr Reddy stock is now up 9% since Jan 17 2020 which is not bad. The only issue – you don’t know which resistance will create a new barrier for the stock is a significant way. Usually, such stocks test your patience but as long as you buy just when it’s turning around, you can ride it and develop a significant margin of safety when the real momentum begins in the stock which will come much much later, if it has to.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purposes. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers
Dr Reddy struggling due to Web of Resistances