After a decline of more than 40% year to date and 60% over two years, we've been eyeing Tata Motors Limited (TATAMOTORS.BO) on the long side for some mean reversion. For the past two months, the stock has been range bound, but the recent breakout has shifted the reward/risk in favor of the bulls over the short term.
Below is a nearly four-year daily chart of Tata Motors showing the steep declines noted above. With that said, prices broke below their 2016 lows in June and began consolidating within a relatively tight range as momentum diverged positively.
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Friday, prices were able to close back above the 2016 lows at roughly two-month highs, confirming the potential failed breakout and bullish momentum divergence we've been watching. This provides us with an opportunity to be long the stock if it's above 266 Indian rupees, with an upside target nearly 20% higher at its 200-day moving average and former support (326 rupees). (See also: Tata Motors: A Tale of Two Businesses.)
We like this type of setup because our risk is very well defined and the reward/risk is skewed in our favor. Additionally, we'll likely know if we're right or wrong here very quickly, as we did with our mean reversion trade in Hindustan Construction. From failed moves come fast moves, so it's important that we see follow-through shortly after getting confirmation.
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