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The markets reversed completely in today’s session, all thanks to a sharp decline in the US markets. The index is currently down 0.51% to 19,287, by 12:20 PM IST and even the small and mid-cap spaces seem to be losing their ground today.
Those looking for some short opportunities should have a look at Trent Limited (NS:). It is a large-cap apparel retailer with a market capitalization of INR 73,552 crore and currently trades at an expensive TTM P/E ratio of 150.85. This high valuation is one of the two key reasons for becoming bearish on this counter.
Image Description: Daily chart of Trent with the RSI at the bottom
Image Source: Investing.com
The other reason is the technical one. The stock has shown a one-way rally since 8 August 2023 and didn’t stop anywhere to take a breather. This continuous rise in the share price also led the RSI (daily, 14) to show an overbought reading of 84.82 yesterday which is noticeably above the benchmark overbought reading of 70.
Clearly, the stock has become overbought which makes it a perfect candidate for a mean reversion trade. As per RSI, the sell signal is generated when it crosses below 70, which is yet to happen in this case, however, there are other clear bearish signs that are materializing.
Firstly, the stock has breached below its rising trendline support on the daily chart which is denoting a trend reversal. This is a very sharp trendline and a break below this can start the fall at an equally sharp pace.
Another reason is the presence of a Doji candlestick on the daily chart at the top end of the rally. This pattern shows indecisiveness among market participants. When it forms at the top or bottom of a move, a reversal can be expected which has exactly happened in this case.
These bearish signals are pointing to some correction in the stock from here. Even if the stock is to fall back to a 38.2% Fibonacci retracement level of the rally, that level comes out at around INR 1,925. The CMP is INR 2,014.
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