Volume Accumulation and Bottoming Out on GUFL, Bought at Rs. 833

I bought Gurkhas Finance Limited (GUFL) primarily because of volume accumulation and likely indication of bottomed-out conditions.

The stock has enjoyed an aggressive bullish advance in the recent past. From the start of the year 2020, GUFL has gained over 700%.

However, it lost around 50% from the most recent peak, which was also the all-time high.

This is too big a correction, and the stock seems to have bottomed out with the formation of a green candle with a long lower wick.

What’s peculiar is that the stock saw massive accumulation during the bottoming out. The series of volumes seen during this time period was above-average.

First Analysis

Analyzing these details, I had projected this on my Instagram page @nepsetrader on January 10:

Trend-following technical analysis trading approach to ordinary shares of Gurkhas Finance Limited.

Gurkhas Finance Limited (GUFL) may give a very attractive risk: reward ratio of 1: 4.

At first look, it seems that the pivot points (a) (b) and (c) give a strong resistance zone very near the current price, that is, at the line (1).

However, on careful analysis of volume, this area may lack significance because points (a) and (b) do not have enough volume. Point (c) may be considered a part of the same price action that we are in at the moment.

Thus, the nearest significant resistance may be at the line (2).

The uptrend signal may be invalid if the stock begins to fall further below the most recent low. We’ll simply take the lowest wick of the lowest candle, that is, line (3) as the stop-loss.

If valid, GUFL may give a profit higher than 70% in the next series of swings. If invalid, anyone who takes a position may be stopped out at about 15-20% loss.

The accumulation in recent trading days (witnessed in the volume) may have made the action more credible.

Revision to First Analysis

During my first analysis on January 10, GUFL was at Rs. 829. The stock then gained 7.84% on the next day. However, the price movement was boring in the next series of trading sessions.

The stock then started losing and came as low as Rs. 819. This was on January 19.

Note that the accumulation was still intact, and the bottoming out signals were intact too.

Thus, I decided to buy a few shares at Rs. 833.

Trend-following trading approach to ordinary shares of Gurkhas Finance Limited.

Personally, I do not like to bargain for a rupee or two. Most traders I know put their order at a few points below the last traded price (LTP). They think that price will eventually climb back at some point in the session. I hate to put a buy order and bite my nails waiting whether it will be executed. Life should be more fun than that.

While the stock may certainly fall a few points after I buy and be cheaper on the same day, I have seen the price climb way up and never return. Do you know what sucks more than buying a stock at 2 points higher? Rush-buying a stock at 20 points higher just because your greedy ass put your buy order 2 units lower.

Now, if you think split-bargaining increases your efficiency or improves your profitability figures, you should keep doing it no matter what I say.

Revision to stop-loss

On my first analysis on January 10, I had projected a stop-loss of around 10% to 15% below the entry price. At that time, it sounded rational enough given the higher profit target.

However, on careful analysis, in this case, I felt that it shouldn’t take that long to realize that your trade has turned sour.

Hence, instead of turning a blind eye until a 15% loss, I will start being more careful when the stock begins to trade near Rs. 750 or lower. While Rs. 800 may look like a significant psychological price level to pay attention to, it is too close to my entry zone and thus insignificant in percentage comparison.

After my initial experience with NEPSE’s bull cycle documented in Season 1, I have decided to use a more holistic technical analysis approach instead of a fixed set of strategies. This is why GUFL currently does not fit into my old trading strategy now but I still bought it. Whether this holistic, gut-feeling approach will work is up to the market to decide.

Update:

On January 23, Gurkhas Finance Limited (GUFL) posted a net profit decline of more than 88% in the second quarter of FY 2078/79 compared to the corresponding quarter of the previous fiscal year.

Four trading days after that, the stock has lost almost 9% and is now at Rs. 781.

Another Update:

Banks and financial institutions unveiled their interest rates profile today (February 13) for the month of Falgun. They have raised their interest rates, in response to the liquidity imbalance. Since interest rates have an inverse relation with the market, NEPSE is down 2.98% right now. GUFL has lost 3.46% for the day and is trading at Rs. 731. The market is still open while I write this.

Explanation

Interest rates and the stock market have an inverse relationship, as higher interest rates on deposits, which are safe investments, discourage the investors from investing in stock markets, which is risky.

(Example: Why risk your money on stocks if fixed deposits can provide double-digit yearly returns?)

Backdrop:

Nepal Rastra Bank had previously taken measures to limit a sudden hike in interest rate.

The central bank believed this would minimize the impact on borrowers and businesses that would otherwise be hurt by the rise in interest payment expenses.

However, the liquidity scenario worsened despite the central bank’s measures. The national banking economy had very little liquidity, which strangled credit flow.

As such, the central bank has now instructed banks to raise the interest rates in order to attract more deposits and ease up the liquidity crisis.

Actual Numbers:

Most commercial banks provide a 6.03% interest rate p.a. for depositors on savings.

Meanwhile, individuals will get a maximum interest payment of 11.03% p.a. on fixed deposits.

On the other hand, institutions will get a 10.03% interest payment p.a. on fixed deposits.

Development Banks have also raised the interest rates on deposits. Regional level development banks have increased the interest rates on fixed deposits to 11.65% and national level development banks to 11.55%. This is the rate for individual depositors.

Nonetheless, Sindhu Bikas Bank provides even more: 11.81% on fixed deposits for individuals and 10.81% for institutions.

Finance Companies have also raised the interest rates on deposits.

The highest interest rate for individuals on fixed deposits is 11.71%.

Update on March 10: State of Complete Paralysis

Trading psychology really took over me in this trade. While I write this, GUFL is at Rs. 611, way below my expected stop loss level.

First of all, as I have said already in this article, I felt that GUFL would not test lower support at all. However, my overconfidence was quickly crushed by consecutive days of loss.

The stock is way below my farthest support now, and all I am doing is hoping that the trade will break even.

I should have exited early.

Look at that steep fall, ouch. Should have exited already.

This trade gave me a hard spanking and a valuable lesson: Never let emotions take over your trade. Swallow your pride and exit when you have to.

Now, even if the stock gains and breaks even (it gained 5.64% today), I will take this trade as a loss, because I ditched my own strategy.

It is like the sailor of a ship who didn’t obey his compass for directions. Now, his fate is solely dependent on the current of the wind and the direction of the waves. Even if he comes out alive, he is a bad sailor, one who didn’t stick to his plan.

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