Alkem: A Good Lesson For Attention Bias 12-04-2018
When Alkem got listed it was seen as one of the possible replacement buys for the other pharma majors that were being pounded at that time. Lack of ownership and some positive news flow helped the stock to make some good progress and it doubled from 1170 to 2240 levels in a short time. This portion shows a nice ascent with a good trend line support. After that the stock underwent some consolidation as first wave of profit booking emerged, but that brought it in fresh buyers, this time of Institutional nature and we saw formation of a nice rounding pattern right at the high. The pullback during the rounding maintained precise Fibonacci relations with the rise, increasing the confidence in the stock’s prospects. So the breakout that occurred in Jan 18 was probably greeted with enthusiasm by those who look at prices only.
So far so good, both fundamentally and technically. If you had seen the chart till this time you couldn’t have foreseen what was to come. I have drawn a vertical line on prices and oscillators to demarcate the changed situation. To the left of that line, everything is perfect. But trouble begins from there. At that time, there was NO NEWS about impending US Fda inspection etc. Alkem was thought to be one of those newer and better plants where no trouble should occur definitely not a good lesson.
The first hint of some problems came when prices met a projected price target (1.272 of contra swing) and formed a Doji on weekly charts. But this happened at around the highs and in all probability would have been ignored. The prices also did not show any downside action. So technically, one may have got lulled into buying the fundamental story. There was a mild rally for a couple of weeks that took resistances at the rounding pattern high. Oh, a handle is forming now, we would have told ourselves. Perfect cup n handle pattern! Buy- would be the cry of most TA’s.
Then- trouble in paradise. The first news came on 16th March but the more detailed one came only on 28th March. But technical variables had started kicking in. The ADX line on the weekly chart peaked out by 4th Feb and reversed. Since the rise was good it was something to pay attention to. But mostly, we would not have, as our attention would be riveted on the superb rounding pattern. By mid Feb, the RSI had slipped below the overbought zone and in the next rally could not make it past that level again- a good signal that trend strength is falling apart. But again, we would have remained in the past and been caught up by the good cheer surrounding the stock.
The fall in the weekly charts occurred in the week of 18th March. By then TA signals were in place- all it needed was to heed them! The price was @ 2200. It has since been falling for 5 successive weeks and are now down to 1775 as I write this. The “news” has broken big time today- with many observations and analysis of those observations as being nasty and difficult to solve etc. People will start reacting to the news now. But look at the damage! 500 points are gone already!
All because once attention was on the wrong element! While the rounding pattern is the most striking portion of this chart, its failure (quick pull back after attempted breakout) should have been warning enough. The Fibonacci target zone plus the Doji weekly candle were more evidence. The RSI was into a class 3 divergence there already.
Moral of the story is Pay attention to technical signals ALL THE Time. Stocks don’t announce loudly about intent to reverse. But they definitely send out the message. It is up to us to see, listen and follow. With Alkem the attention bias was on the newness, the fundamental story, the lack of ownership and minimal research coverage leading to limited information flow and the distinct pattern on the charts. All of these were distractions from the developing changes and good lesson.
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