Small and mid-caps have been hit hard since late August, so rather than look for short opportunities after a large move, we're looking for potential countertrend trades on the long side. Today's candidate is PTC India Limited (PTC.BO).

The stock has been trading to the downside since the fourth quarter of last year; however, the weekly timeframe shows that it's structurally range bound at best. Prices recently retested their 2018 lows, undercut them and quickly reversed, shifting the short-term reward/risk in favor of the bulls.

Technical chart showing the performance of PTC India Limited (PTC.BO) stock

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Let's take a look at the points that are relevant from the chart above.

  1. Our downside price target has been met.
  2. Prices undercut that price target and quickly reversed.
  3. Momentum diverged positively as prices made a new low.
  4. Prices are very extended from their mean (200-day moving average).
  5. Quick follow-through confirmed the supply/demand imbalance.
  6. Short interest in the stock (not required, but amplifies the move).

All of these characteristics combine to help create an entry where our risk is well defined, probability of success is elevated and reward/risk is skewed in our favor. We know going into it that countertrend trades have a lower probability of success, but we're willing to accept that when the reward relative to that risk is high enough (i.e., 10:1 or higher). That threshold is going to be different for every market participant based on his or her process.

With that said, if PTC India is above 67.90 Indian rupees, we can be long with an upside objective near 85.25 rupees. Like the other trade ideas that originate from this type of setup, we're likely to know very quickly whether or not this trade will work. If it doesn't, we know where to get out with minimal losses and can move on to the next opportunity.

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