Identify potential multibagger stocks with simple averages

Many people believe technical analysis isn’t very useful in identifying stocks for the long term.

But that’s a myth.

Simple yet effective technical analysis indicators can help you identify potential multi-baggers at an early stage.

Many of us endeavour to identify stocks trading at low denominations (in the range of Rs 50 to Rs 500) which can multiply our wealth 5-10-15 times.

What’s the impediment then?

The inability to buy right stocks at the right prices.

Widely used technical jargons such as technical programmable mathematical algorithmic formulas, identification of technical historical trading patterns, identification of technical indicators and triggers and identification of potential trends for future price movements, among others, discourage investors from following technical analysis.

But, there’s no need to worry about them.

In this article, we are going to share with you a simple rule to spot potential multi-bagger stocks.

To begin with, plot simple monthly averages (for 12,24,36,48 months) of any stock on monthly charts.

Conditions that should make you consider these stocks as potential long term bets:

• The current monthly bar should be trading above all averages
• All averages - the 12, 24, 36 and 48 simple moving average trend lines - should be trending up.
• Sequentially, the shorter averages must be plotted above the longer averages.

In our case the 12-month average is represented by a white line, 24-month with yellow, 36-month with blue and 48-month with red.

Entry Point:

The 12 month average line (white line in our case) should be above all other lines, representing  24-36-48 monthly averages, which are trending upward, with the monthly price bar of the stock positioned above all averages. In the initial phase, the stop loss would get triggered if the monthly candle breaches the 48-month average.

As a prudent stop profit measure, you should sell half of your holdings when the price appreciates 100% from your buying price.

When should you sell the remaining lot?

Good question…

If the stock multiplies 5 times or more after you bought it, you might follow 12 or 24 month averages (as denoted by the white and yellow lines respectively, in our illustrations) as stop-profit indicators, if the price bar closes below these averages, you should exit long.

Should you re-enter the stock at any time in the future?

Yes, you can; provided the monthly average candle is positioned above the 12-month, 24-month, 36-month and 48-month averages again and all averages are trending upwards, and are positioned one above the other sequentially.

A prudent investor who believes in the effectiveness of technical analysis never disputes prices. Markets are rarely wrong, opinions often are.

Markets go up, down and sideways. They trend. They flow. They surprise. Trend trading demands self-discipline to follow precise rules.

Let’s take a few examples of using monthly averages effectively.

In the chart below, ABB Limited was a screaming ‘buy’ in the range of Rs 60-80 in late 2003 and in the early part of 2004. This was the time when the monthly bar was positioned above the 12-month, 24-month, 36-month and 48-month averages and all averages were trending upwards.

A wise investor, honouring the price movements and technical indicators would have exited the stock in the last quarter of 2008 around Rs 1,200 –1,300 levels when the monthly price bar fell below the 24-month averages. It’s noteworthy that, from the top, the stock was 20%-25% down, which many would have thought was a good buy then, but it had just started its extended downtrend.

Nonetheless, those following the indicator of monthly averages meticulously would have grown their money 15-20 times in 4 years—between 2004 and 2008.

ABB

Aurobindo Pharma

Entry point: Rs 150-200 in 2013 (monthly candle positioned above all averages and all averages were trending upwards)

Exit: Around Rs 700 in 2016 (when the monthly candled breached 24-month average)

Bajaj Finance

Entry point: Rs 200-300 in 2014 (monthly candle positioned above all averages and all averages were trending upwards)

Exit: The monthly candle hasn’t yet breached 24-month average and averages aren’t trending downwards either. However, those who enjoyed the run from Rs 200-300 levels could have sold around Rs 1000-1200 zone in 2016 when the monthly candle breached 12-month average line.

Eicher Motor

Entry point: Around Rs 1500-1600 in 2009 when the monthly candle positioned above 12-month, 24-month, 36-month and 48-month averages and all averages were trending upwards.

Exit: Those who enjoyed the 10X run could have offloaded around Rs 18,000 level in 2016 when the monthly bar breached the 12-month average. The monthly bar violated the 24-month average only in 2018, offering an exit opportunity around Rs 28,000–30,000.

HCL Tech

Entry: The stock offered an entry opportunity around Rs 200-300 zone in 2012

Exit: The exit would have got triggered in 2015 around Rs 800- 900 when the monthly bar breached the 24-month average.

Crucial observation:

You will often see the monthly average indicator getting triggered when the stock comes out of a prolonged phase of consolidation and starts moving upwards.

Disclaimer: Ventura Securities Ltd has taken due care and caution in compilation of data for its web blog. Information has been obtained from different sources which it considers reliable. However, Ventura Securities Ltd does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Ventura Securities Ltd especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its web blog. The information provided herein is just for the knowledge purpose and shouldn’t be construed as investment advice under any circumstances.