What is the Principle of Polarity?
'Price itself is the most important and reliable indicator’. If one can master the art of understanding price action, one is ready to succeed in trading. However, to understand price action, the single most important concept to grasp is the Principle of Polarity.
This is the most widely applicable principle in technical analysis. At the same time, understanding change in polarity principle is also extremely simple. But before we get to this principle, we must understand what are support and resistance.
Support is a level in a declining market trend where there is a temporary halt due to more buying pressure than selling pressure. These are the troughs in the market. They are reaction lows where the demand overwhelms the amount of supply. Since there is enough buying pressure here to overcome any selling that there might be at this level, the result is a pause in decline where prices then reverse back up again.
Resistance is the exact opposite of support. Resistance is a level in a rising market where the selling pressure is so much more than the buying pressure that there is a temporary halt in the uptrend. These are the peaks in the market, or reaction highs where supply exceeds demand.
Since there is enough selling pressure here to overcome any buying, prices stop rising and reverse back down again. A break above resistance is considered to be bullish while a break below support is considered bearish.
The Principle of Polarity states that once a resistance level is breached, it changes its nature and becomes support the next time it is approached. This happens due to a change in demand and supply.
Why buy Adani Ports and Special Economic Zone?
Technical analysts use support and resistance levels to identify price points on a chart where the probabilities favour a pause or reversal of a prevailing trend.
Market psychology plays a major role as traders and investors remember the past and react to changing conditions to anticipate future market movement.
Adani Ports is trading near the supply zone and the chances of breaching the above-mentioned resistance are very high. The Principle of Polarity suggests a buying opportunity on a close above the immediate line of resistance standing around 365 marks.
At the same time, it is also trading above 20-DMA and 50-DMA, which is also conducive for bullish momentum. Above mentioned technical rationale suggest buying opportunity in the stock.
As per the chart, one should book around the recent swing high, which is placed at around Rs 405. So, one can consider profit-booking near the target zone around Rs 405 and the higher side towards the Rs 420-mark.
Entire bullish view negates on a breach of the previous swing low and in the case of Adani Ports, we will consider Rs 340 as a stop loss level on a closing basis.
We recommend buying Adani Ports and Special Economic Zone above Rs 365 with a stop loss of Rs 340 for higher targets of Rs 405 as indicated in the above chart.
(The author is Head of Technical Research at Narnolia Financial Advisors.)Disclaimer
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