In early October 2001, the three chaos lines were inter-twined with each other, thus suggesting a sideways market. Then, the chaos lines changed direction and gave a buy signal. A buy signal comes when the three chaos lines are aligned to give a bullish trend. This alignment is:
GREEN - At the top
RED - In the middle
BLUE - At the bottom
This happened on October 12, 2001. See chart below. The stock could have been purchased for 159.45, at the close. Note that prices continued to drift sideways for many days even after the buy signal was received.
But, soon enough BPCL began an impressive up move.
On December 10, 2001, almost 2 months later, BPCL rose shaprly but could not sustain the highs, and close lower. This was a Range Expansion – A sharp rise / fall with a large range. This is usually a sign that the stock will experience at least short term exhaustion. We could have exited around Rs 212, for an excellent profit.
A second chance to enter BPCL came in January 2002. After a sideways drift for more than a month, BPCL again gave a chaos buy signal on January 23, 2002. The three Chaos lines were aligned in a bullish trend. Buying could have been done around 210.45. After a sideways drift for a few days, BPCL broke out to new highs. A range expansion took it to 280 where profits should have been taken. This happened around February 11, 2002.
For best results, a chaos buy signal should be supported by some additional inputs. In case of BPCL, in October, our newsletter had identified this stock as having broken out with the potential for new highs. In January, BPCL was trading sideways for over a month and could breakout in either direction – up or down. Once the Chaos buy signal came, we could anticipate that the breakout would be up and take positions.
No positions should be taken without a clear concept of the EXIT route if things do not go our way. For Position Trades, stop loses should be put around 10% below the buying price.
