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A few sessions back I analyzed Power Finance Corporation (NS:) as it was looking weak on the charts. In this article, I am looking at another similar counter – REC (NS:). The stock is also looking poised for a correction and it’s no surprise because both these counters are highly correlated.
REC is a large-cap specialized finance company with a market capitalization of INR 62,881 crore and caters to the entire power sector in India. The stock has delivered a staggering rally of 124.7% in the last 12 months and now seems to be taking a breather. Although any stock that is trading near its all-time high is not weak, this specific stock can become a good candidate for mean reversion for a couple of reasons.
Image Description: Daily chart of REC with volume bars at the bottom
Image Source: Investing.com
Firstly, its counterpart – PFC is also looking weak and as both moves in tandem with each other, the fall in REC can be a ripple effect of PFC’s weakness. On the technical front, the stock formed a large bearish candle on 31 August 2023 at the very top-end of the rally which is definitely not a good sign for bulls. This was the sharpest one-day decline after 14 July 2023 and depicts the intensity of selling pressure.
Secondly, the stock also broke below its rising trendline support on the daily time frame. This trendline had been keeping the stock from falling and this break has violated the ongoing uptrend. Now, as long as the current all-time high of INR 249.25 is not breached, traders should not fall for retracements (like today) as a buying opportunity.
In fact, these minor bouncebacks can become a good short-selling opportunity in this counter and give better rates to go short. This is very important considering the contract value in the derivatives segment which is roughly at INR 19,50,000. This is probably the highest contract value I’ve seen till now. This is also the reason why managing risks in this stock is non-negotiable.
On the lower side, the stock can further slide to the next support of around INR 230, from the CMP of 242.5.
Disclosure: I hold REC shares in my portfolio.
In case you want to connect with me, reach out on Twitter. My handle is – aayushxkhanna
Read More: How to Select High Momentum Stocks? A Practical Guide!
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