RSI calculates strength of stock trend and helps to predict their reversals.
Relative Strength Index or RSI is a momentous oscillator used to identify trend reversal. Invented by Welles Wilder Jr, it calculates the strength of a stock trend and helps to predict their reversals.
The default look-back period for RSI is 14, however, this can be lowered to increase sensitivity or raised to decrease sensitivity.
Why Buy Tata Motors?
There are a lot of trading strategies using RSI; below mentioned is one of the most popular among the trading community which involves buying after completing retracement for higher movement; however the support of another momentum oscillator stochastic can give additional support.
On Tata Motors chart, RSI gave a breakout by trading above 50 levels from below and made a high of 75 then after it is trading lower or retracing towards centre line placed at 50 levels, this behaviour is called as ‘RSI PBB’ setup.
RSI PBB is pull back buy setup which indicates, once the RSI turns its tail upside after taking support from zone of 45-55 levels, the target is previous swing high of RSI which was 75 or previous swing high of prices (200).
Currently, Tata Motors is going through this setup and we expect higher price movement towards previous high 200-210 levels in coming days.
Buy Signal:
1. Recent RSI gave a breakout and published swing top around 75 levels.2. After marking high of 75, RSI is retracing towards 50 towards mid-line standing around 50 marks.
3. Strong bullish candle formation near the buying zone has given us confirmation of retracement complete and original trend begin.
4. Midterm moving average 50 DMA placed around Rs 154 levels defines mid-term trend is very well augur with bulls as prices are sustained and trading above it.
5. Decent volume participation while forming a bullish candle will also give additional confirmation.
Profit Booking:
Whenever price candle will be near previous swing high which is near Rs 200-210 levels.
Stop Loss:
Entire bullish view negates on breaching of a swing low and one should exit from a long position. In the case of Tata Motors, it is standing around 148 marks.
Conclusion:
We recommend buying Tata Motors around Rs 160-165 levels with a stop loss of Rs 148 for higher targets of Rs 200 and 220 levels as indicated in the above chart.
The author is Head - Technical & Derivative Research, Narnolia Financial Advisors.
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