After a 25% Fall, This Stock is Ready for Mean Reversion!

Whenever a stock falls or rises at a rapid pace in a short span of time, the chances of a mean reversion become high. Mean reversion is simply a tendency of a security to revert to its mean price after a noticeable deviation. This is contrary to a trend-following concept wherein stock is deemed to follow the existing trend irrespective of its deviation from the mean price.

In simple words, buying the dip and short-selling the rally are examples of mean reversion trades. One stock that has come on my radar that has fallen considerably from the high and is now looking to pare some of the losses is Balkrishna Industries Limited (NS: BLKI ). It manufactures tyres which are used in a wide variety of vehicles such as in industrial/commercial, agricultural, earthmover vehicles etc.

The share price of Balkrishna industries made a high of INR 2,450 in August 2022 and soon after that, crashed to a low of INR 1,825 last month, reflecting a fall of around 25% in two months. That kind of sharp selling spree is generally met with robust demand from the lower levels and these stocks become a good candidate for a counter-trend rally. 

From the low of INR 1,825, the stock has already started to inch up and is currently trading around INR 1,935 which shows that the momentum has already started to pick up. During the fall, the stock had been respecting its falling trendline resistance, a break of which was the first signal of a trend reversal that came on 4 October 2022. The stock rallied above this resistance level and closed above it with strength.

Today, Balkrishna Industries shares not just continued their rally but also crossed above the swing high of INR 1,935 which was marked on the trendline breakout day. Therefore, after the breakout signal, the stock delivered another bullish sign by making higher high and high low formation. All these signals combined are painting a bullish picture for the stock, at least for the short term. 

Even if the stock retraces around 50% of the previous fall, then the level comes out to be INR 2,140, which gives a decent upside potential of around 10% from the CMP. On the downside, as long as the low of INR 1,825 is holding its ground, the stock should be deemed to be in a short-term up trend.