If you are watching the live market regularly, you may come across few stocks which "freeze". Once a stock is upper frozen, the price cannot exceed that value for the day. Similarly once a stock freezes on the lower side price cannot fall below that value. Trading of course, will continue. The stock exchanges generally keep a limit on how much the price of stock can fluctuate during a trading session. There are exceptions to this rule as well. For those scrips which are traded in Futures & Options segment, no price bands on either side (i.e. upper or lower price limits) are applicable. However, the exchange may temporarily prevent the erroneous order entry by limiting the order price to say about 20% of previous close value.
At NSE at least 4 price bands are available depending upon the volatility. For cash segment, these are fixed at 20%, 10%, 5% ad 2% . For the Nifty 10% , 15% and 20% circuit breakers are applicable i.e. trading may be suspended temporarily at 10% and 15% while at 20% session will be closed for the day.
As a newbie I always wondered why some stocks hit the upper freeze limit and some others hit the lower limit. The freeze is obviously due to excessive demand or supply. Can a technical analyst spot these "freezes" and become richer by 20% every day or alternate day?
I tried to find an answer to these questions. Opportunties could be there but the risk involved with this type of trade is very high. Let's discuss the daily chart of Manali Petrochemical Limited as an example.
In the chart shown above, waves 1 through 5 are indicated. Usually, wave 1 will be the shortest among 1, 3 and 5. Theoritically, wave 3 would retrace 1.618 times wave 1 while wave 4 cannot fall below the high of wave 1. In this particular case, wave 1 failed to break the resistance at 14.40 on a close basis. During wave 3 the stock didn't close above the high of wave 1 as well. The highest volumes during wave 1 and 3 are marked as x and y. Wave 4 terminated slightly above the low of wave 2. After 3 days of the beginning of wave 5 high volumes were noticed (marked as z) and the stock gained 2.45%, 20.14% and 7.39% in the next 3 trading sessions. The long upper and lower shadows on the last day indicate high volatility. This was followed by a bearish engulfing pattern which was confirmed by a negative close next day. After nearly 5 weeks, the stock fell to back to 10.25, the low of wave 1.
This can be considered as a "violation" of Elliott wave theory. There are other examples as well, like:
- A stock may break the critical horizontal support (low of wave 1) but it might bounce back strongly; an exit opportunity for the bulls and a possible trap for the bears.
- A stock may break the trendline support but a strong rally may be seen; again, exit opportunity for the bulls.
- Usually, increasing volumes with increasing prices indicate bullishness during impulse waves; declining volumes with declining prices indicate that the stock is likely to bounce back after correction. However, when volumes increase and prices fall during corrective phase, it is an indication that the stock may turn bearish. In such a case, bulls might push up prices quickly to exit stocks.
While it is true that stock prices are determined by the market participants during trading, these types of "traps" are always part and parcel of the trading game.
Moreover, all stocks which fit into this category may not yield "quick" returns! The bulls may be concentrating on few stocks and it is just not possible to figure out those using conventional technical analysis methods.