Relevance of Dow Theory in the Earnings season

As the results season where all listed companies have to mandatorily announce their quarterly results at the end of Q4FY18 comes to an end, there are a lot of disgruntled and more often confused set of investors upset with the price movements witnessed in certain stocks in the last 2 months.

The general trend or norm is that if the company reports a good set of numbers, ideally the stock price should react positively & vice versa. However, in cases like SBI, Axis Bank and several other PSU banks, the exact reverse has happened where poor operational performance has actually resulted in a recovery in their stock prices. While companies those have reported good results like Maruti have taken a hammering over the last few weeks leading to a section of traders or investors disillusioned with the price movements. The explanation is very simple & logical as explained by Charles Dow that the market discounts everything! If one closely observes the price action mentioned in the above mentioned stocks pre result, you will understand that people had already prepared themselves for a particular company posting good or horrible results and had already factored that in the price movement before the event. Once the event was in line with their expectation, those traders have booked profit in their respective Buy/Short positions thereby resulting in a complete reversal in the trend. This is the reason why Dow theory remains more than relevant today than ever! If trading was so easy where good results resulted in increase in stock prices and vice versa, everyone would be a billionaire!

Hence, besides being a skilled technical analyst, it also becomes important for investors to keep track of major events or data being released from different countries or even keeping track of important corporate announcements like Bonus, stock split, dividend etc. This will help us take informed decisions and use the candlestick patterns to accordingly trade & profit from this volatility. In India, we have 3 state elections lined up in the next half of the year which could lead to tremendous volatility in the market. Even though these are state elections, traders & investors will use these results as a precursor for the 2019 general elections as a potential new government could result in new government policies thereby creating uncertainty amongst investors. Hence, it is advisable to avoid taking very risky trades and always have a strict stop loss while trading. One could also potentially have good returns in companies showing consistency in terms of results and steady stock price performance specially excellent Large cap & some very good mid cap stocks as the volatility increases. Even though, small caps have tremendous potential to grow in a bullish environment, in volatility, fortunes could reverse and result in extreme price movements even on the downside. Thus, one should focus on controlling one’s risks over the next 6-9 months & trade with more discipline. It will surprise you to know that it isn’t all that difficult to make good money after all! Happy trading!

Share this Post!

About the Author : shettypavitra

Send a Comment

Your email address will not be published.