I’m planning to buy Shangrila Development Bank Limited (SADBL) after it goes through a small, much-needed correction.
Volume confirmation has been positive on this stock. It has also fought back the bearish spell that was cast from August to December last year.
My only issue is that SADBL has gained around 50% in a steep incline. Often when this happens, it is better to wait for a correction before entering.
Previous Track Record With SADBL
Note that I had bought SADBL previously in the earlier phase of this bull run at Rs. 155 per share. I made a quick 15% profit in 15 days and sold the stock at Rs. 180.
However, the stock gained significantly higher than that, and that trade became the flagship of many that came after in a series, all that made me question my strategy. Remorseful and wiser, I have now decided to follow the trend-following approach in order to ride a longer trend instead of looking for a fixed percentage profit or a single momentum swing.
While I write this, SADBL is at Rs. 446. It certainly is a significant leap higher than during my last entry in the stock. However, I am trying hard not to be a slave of the anchor effect. Basically, the anchor effect makes you believe any price higher than your last entry or exit price is too expensive, just because that previous price is anchored to your mind. The anchoring effect may also lead someone to believe that any price below their previous trade price is too cheap.
Both ways, an investor will end up having a distorted picture of the current market sentiment.
Instead of basing a stock’s price stance on its previous price, it is better to consider its fundamentals, market sentiment, and market cycle. A stock may be priced low but it does not mean it is cheap for its worth, or it may be priced higher not necessarily meaning it is expensive for its value.
Pep talk aside, let’s get down to business.
The stock may start losing first
A hanging man candlestick has formed on the daily chart on January 20. The stock opened higher, then lost aggressively at some point in the day. The bulls were able to get the stock back near the opening price, resulting in the formation of a long lower wick.
While the bulls did not let the bears have their way, it is evident from the aggressive selling that the trend is likely to change direction. Furthermore, the volume on this day was higher than normal. This adds further credibility to the signal.
However, a candlestick confirmation would add surety to the observation. If the next day’s candlestick closes lower and is preferable red, we have received further confirmation of a possible trend reversal. Nonetheless, the appearance of such an impactful candlestick pattern after a bullish swing is certainly an indication that a correction is ensuing in the near future if not immediately.
How low will the stock go then?
I have drawn probable support levels to ascertain how low the stock may reach.
The first support line is drawn at Rs. 383.42. However, it does not hold contemporary credibility because the price did not budge at this level in the recent upwards swing. Nonetheless, it is seen that SADBL has historically treated this price level as support and resistance. Add this to the fact that the stock may refuse to lose a higher percentage after such an aggressive rise, this level may very well act as the nearest support for the stock to bounce back.
If the price does not obey that support zone, it may come as low as Rs. 354.46, because this level holds recent credibility (price acknowledged this level). Furthermore, SADBL has historically acknowledged this level as support or resistance too, as is seen in the figure above.
Thus, I am looking for the price to come down to one of the two levels. Nonetheless, if I had to vote, I would argue that the price has a 40% chance of bouncing up from the higher support at Rs. 383.42 and 60% chance of bouncing back from the lower support of Rs. 354.46. At the same time, I wouldn’t be surprised if the price bounces back from anywhere between these two zones.
Hence, I plan to buy SADBL around those support zones, preferably after an indication of a bullish reversal.
How high can SADBL go after the correction?
On analysis of volume, it can be ascertained that SADBL may face difficulty to break above the all-time high of Rs. 575. Still, entering after a correction as explained above may yield a momentum trader around 40% profit.
However, I have modified my strategy to the tune of the trend-following approach. Hence, if the stock keeps making higher highs, I will keep holding until the stock falls below the previous pivot low.
Additionally, I have been dabbling with the Elliot Wave Theory approach. As such, below is a rough estimation of how the stock’s trajectory may be, assuming that the latest bullish surge was wave 1.
According to the Elliot Wave Theory, wave 2 causes a stock to lose around 50-60% of the gain seen from wave 1.
Wave 3 is the longest, and wave 4 never intersects below the territory of wave 1. If this happens, our setup is invalid and we recount the waves.
Update on Feb 15: SADBL Went on Correction Indeed, I bought a few shares
While writing this, SADBL has lost around 15% from the most-recent pivot peak. It went as low as Rs. 388, which is near my first assumed support level of Rs. 383.42.
I sensed that the stock was refusing to lose further from this level.
Thus, I bought SADBL today at Rs. 399 per share. The stock then closed at Rs. 407 for the day.
The price seems to be attempting a reversal. Nonetheless, confirmation is still pending, and I do carry the risk of having entered too early.
I will keep you updated on this one.
Update on March 10: SADBL Tested the Lowest Support
SADBL lost around 22% from the peak where I first predicted a fall. It went to the second support zone that I assumed.
I had forecasted that the second level of correction if happens, would take the stock to as low as Rs. 354.46. Today, the stock went as low as Rs. 350.
The stock has gained 5.35% today, signaling a promising potential of bullish reversal. Furthermore, this zone of support is also validated by the Fibonacci retracement strategy.
I’m holding tight. That’s all for now.
Update on April 05: Pessimistic Movement
While the stock did gain promisingly from my last update, the movement hasn’t been very appetizing.
The NEPSE index itself has been losing in the past few trading sessions.
While I anticipated a Wave 3, it is clear to me right now that it did not happen. Rather, SADBL has reversed downwards from a lower high than last time’s peak.
I have now kept a stop-loss of Rs. 370. This is strictly non-negotiable. Rs. 370 and I’m out.
Update: Hit Stop Loss at 366
The stock did venture at Rs. 370 level. By the time I opened my laptop to sell it, it had fallen to Rs. 366. No big deal, it was near my stop-loss level. I exited there.
SADBL Now
Exit from SADBL was a good decision. The overall market in NEPSE lost steeply after that. The index (and the stock) hasn’t recovered since.
