The Market last week took a breather & came down nearly a percent. The primary & intermediate trends continue to remain upward while the short term trend turned down. However, from a sectoral perspective we still find the FMCG index being top performer & hence we select this week’s pick too from the FMCG Index.
ITC (CMP 306.80)
We select ITC as an example of Triple Screen Trading System (TSTS), a screening approach introduced by Dr Alexander Elder in his legendary literature “Trading for Living”. We give a brief account of the method.
The First Screen is the Primary Uptrend. Dr Elder advises to eliminate all such stocks those are not displaying a strong primary uptrend, as evident by a series of higher bottoms on longer term charts, or being above its 200 Day average, etc. ITC, our selection for this week, indeed shows a primary uptrend & therefore qualifies this test.
The Second Screen looks for a tangible pull back. As we are aware, all trends are subjected to periodic pull backs & the reward to risk ratio improves if we get to enter into a stock during such a phase of pull back rather than chasing momentum & buying into new highs. Dr Elder suggested various indicator optimizations to filter out stocks displaying pull back. However, a simple visual inspection of the daily chart of ITC suggests that it is indeed going through a phase of pull back. Thus ITC qualifies the second screen, too.
The Third Screen looks for end of a pull back. It is important to ensure that the pull back is really a temporary halt to the primary uptrend & not the beginning of a downtrend. Friday’s bullish movement in this scrip suggests that the pull back phase is probably over in ITC & it is therefore likely to resume its primary uptrend. Consequently, ITC qualifies the third screen, too.
We therefore recommend buying 50% position in ITC @ 306, add the remaining 50% @ 303 regions & put the stop loss at 298. We propose a potential target for ITC at 320.
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