Dear all. Hope you all are doing well. Recently the talk of the town was the PAYTM disaster. Though the news has started to fade away and people started to talk about other stocks, the disaster it showed was very painful to see. Back to back lower circuits. Stock tanked around 67% from its recent high in Oct 2023.

RBI restrictions on PAYTM bank is touted to be the main reason for the stock’s failure. However, we are not going to keep discussing those stories. I don’t believe in listening to the stories once the mishap has happened. What good can it give us?

The purpose of this article is to show, how one can avoid such failures in future and how usually a stock before its disastrous fall gives lot of chances for us to exit and how the chart was screaming to exit before the lower circuit fall from FEB 1- 2024 (one day after the RBI restriction)

Let’s get into the details:

The news around the stock:

First rule you could have avoided the stock is by having some basic understanding of the stock news. By news I mean, for some reason the stock has not always been in news for good reasons. If you think that the RBI has posted the restriction on PAYTM only on JAN 31, 2024 it is not the case. In march 2022 itself RBI has directed PAYTM to stop onboarding new customers.

See the image below: source : RBI ONLINE

Price Action Vs Fundamentals:

I accept that not everyone can look into the news and trade. That too when your strength is based on technical analysis, it is better to stay away from news which are mostly random noise.

In this case of PAYTM, assuming that I am unaware of the RBI restriction issued in March 2022, as a trader I would have taken the trade on breakout with good volumes. Before taking the position I would have looked into it’s earnings and sales report.

See the chart: The stock broke out strongly in JUNE 2023:

If I was to trade this on that date, I would have checked the fundamentals and on that date JUNE 2023 the earnings and sales were rising and seemed to be a turnaround story. Though the earnings were negative for the past few quarters, it was rising. And sales were definitely growing.

Though the fundamentals of this stock mimics the trait of a turnaround stock, it became a disaster in the coming months. That’s why I consider myself a poor fundamental analyst and I accept that fact. I can’t keep on digging on the fundamental details and get to know all the nuances of it. I always rely on price action rather than fundamentals not because fundamentals are useless, it’s because I am not good at it. 

See the daily chart below:

The stock continued its up move. Around Nov 2023 the stock started to show some signs of weakness. One should start getting cautious, particularly if you are an intermediate time frame trader like me. I trade positions for two to six months sometimes up to a year if the stock is not meeting my sell criteria and is strong.

The stock should be partially booked off or at least should be in sell watchlist at this point. 

Lower High Lower low structure and 50 DMA Break rule:

The stock finally broke the previous pivot and also broke the 50 DMA decisively.

For me this is a complete exit. If I had held any position I would have sold all and exited here. It is the same way I exited DATA PATTERNS for a good profit some months back.

RS BASED Exit rule:

If you had not exited, on lower high lower low structure you should have exited when the Relative strength line broke the zero line. Also note that the RS line was at high only at the time of breakout. Later as the stock moved higher the RS Line didn’t move higher. Signs of weakness were visible throughout the trade.

I had written an article on how to find winners using this strategy in “ Finding The Dark Horse through RS” Do read it for sure. 

Weekly exit rule:

Even if you are a long term trader, you should consider exiting the stock, when the weekly chart prints such a red candle. Biggest red candle being printed on the chart is the worst sign for initiating a new position and best time to exit.

Also, note here that the weekly RS getting into the negative zone.

GAP DOWN with Volume Rule:

If you had not exited till then, even when the daily pivot broke and the 50 DMA was breached with volume expansion, your last chance came on the gap down day on Dec 7-2023.

The real issue:

The chart was screaming to exit, well before the fateful day FEB 1- 2024. 

It pleaded with us to leave it. It said “I am weak, I can damage your portfolio, I am not healthy, get away from me” several times. It didn’t hide anything from us. It was crystal clear that something ominous had to happen in the following days. Only thing it didn’t tell was the story behind the weakness and the magnitude with which it will fall. As STAN WEINSTEIN  says, the TAPE TELLS ALL.

THE NEWS:

Key Takeaways:

• A small research about the stock before taking position, is very helpful.
• If you are a trader and don’t follow news a lot like me, then follow the chart religiously.
• Bar by bar analysis with RS analysis will give you a lot of time to enter, exit.
• Sometimes, even though fundamentals may be good, improving and tempting, it is ultimately the price action that should guide a trader.
• Having a proper sell rule (any rule) is important not only to make profits but to prevent us from drawdowns and disasters. Even a small drawdown can ruin your account. Read my article on drawdowns. It will be worth reading.
• Any stock can become a disaster, that’s why proper position sizing is a must.
• Use my Free position sizing calculator to decide on how much stocks to buy.

I also publish my Trading journals from time to time. Check that out to see how I enter and exit. It may give an idea on how to improve your trading skills. Writing those journals has improved mine.

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