Reversal: ‘Oversold’ F&O Stock Looking to Pare Some Losses!
For mean reversion traders, one counter that has come on my radar and should be on your watchlist is Biocon Limited (NS:). It is a well-known biotechnology company with a market capitalization of INR 28,378 crores and has delivered decent losses in the recent past. The one-way fall in the stock eroded 39.6% of its value in the last one year, giving a tough time to investors.
The plunge since the swing high of INR 295, marked on 21 November 2022 had thrown the stock to a new 52-week low of INR 229.65 on 30 January 2023, where the RSI (daily, 14) was showing an oversold reading of 22, comfortably lower than the benchmark level of 30. These levels should carefully be watched as a short position becomes risky here, while an opportunity for a long one is expected to materialize on the back of a high probability of a counter-trend rally.
Image Description: Daily chart of Biocon with volume bars at the bottom
Image Source: Investing.com
This is one of the favorite setups for mean reversion traders wherein they try to capitalize on this short-term move. The share price of Biocon now seems to be gradually inching up as demand from the lower levels is outstripping the supply, leading the stock to bounce over 6.2% off the low to the CMP of INR 244.1 on 8 February 2023.
As the stock has already started to pare some of the recent losses, the rally might take it to the immediate hurdle of INR 260. Because this is a short-term move, it’s a better play for quick and nimble traders rather than long-term patient ones. As the broader trend is still negative, getting in and out quickly before the rally fades would be the ideal strategy here.
The options chain data is also conforming to the levels seen on the chart, with the 260 CE holding the highest open interest (OI) of 1,037 contracts, making it a strong resistance level. Also, 230 PE has the highest OI on the put side which is almost at the recent 52-week low, a good confluence to make up a strong support level. Hence, for options traders, the range for the current monthly expiry is 230 – 260 with a slightly upward bias.