Chart of the Day: An 8% Rally Leads to ‘Channel Breakout’!

  • Stock Market Analysis
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Today’s investors’ friendly market is giving a host of opportunities to market participants to rake up some decent gains. Many pockets are witnessing breakouts, sharp rallies, and recovery from the lows. As of now, the benchmark Nifty 50 index is trading 1.34% up at 17,859 by 11:59 AM IST and a sea of green numbers is visible across sectors.

Some stocks are looking more promising than others due to their chart structure. One such stock is Gujarat Ambuja Exports Ltd (NS: GAME ) (GAEL) which is a INR 6,325 crores big agro-processing company and its product profile includes solvent extraction, edible oil refining, cotton yarn spinning, maize-based starch, and power generation through windmills and biogas.

Image Description: Daily chart of GAEL with volume bars at the bottom

Image Source: Investing.com

The share price of GAEL soared 7.8% to INR 297.3 by noon. For the last couple of months, the stock had been plunging lower, forming a series of lower lows and lower highs. This price action led to the formation of a downward-sloping channel pattern on the daily chart. The channel is formed by connecting the peaks and troughs during the rally through a trendline, and if a parallel rectangle-like structure forms (with a slight downward tilt) then it is referred to as a downward-sloping channel. Upward-sloping channels are formed during an uptrend.

The pattern reflects a consistent fall in the stock between a confined range which is slightly skewed towards the south. The steepness of this channel is a pure depiction of the strength or the intensity with which the stock is falling. The more severe the fall, the steeper would be the angle of the channel and vice versa.  

In the case of GAEL, the channel has a good angle of descent. But today’s rally surpassing the falling trendline resistance of the channel seems to have marked the end of the current downtrend. This is a reversal signal and therefore should be watched carefully. The volume support on days like this also holds importance. The volume by noon has already crossed the 1.1 million mark, which is the highest one-day volume in over 2.5 months, and still, 3.5 hours are left before the session’s close. 

As the stock has finally surged past this channel, a trend reversal could take place which might help the stock to travel to around the nearest resistance of INR 325, which is the first peak of the current channel pattern. As the session is still going on, a closing above the trendline resistance would be preferred.

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