After a 200% rally, should investors take profits on this stock?

Adani Power (NS:) has become one of the stock market darlings of late. The stock has been one of the best performers in the power sector this year, offering a massive return of over 240% since the start of 2022. However, the bull run that accelerated after mid-March 2022 seems to be running out of steam now.

First of all, a decrease in momentum does not necessarily mean that the trend has changed. While the trend shows the direction in which the stock is moving, momentum basically represents the strength of the existing trend. Therefore, a loss of momentum during an ongoing rally could be seen as an early warning that the current trend is weakening.

Currently, the stock is trading comfortably above its 21-day simple moving average (SMA), which is typically used to describe a short-term trend. However, a mere 4-5% drop from current levels would send the stock plunging below its moving average, negating the short-term uptrend. The stock tends to move from circuit to circuit, so only 1 circuit down could end the uptrend at the moment.

Image description: Daily chart of Adani Power with RSI at the bottom

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Returning to momentum, it has already begun to fade. Looking at the RSI (daily, 14), it has pulled back significantly from overbought levels, which is a strong bearish signal. Although, on the weekly chart, the RSI is still trading in the overbought zone. But the multi-timeframe analysis always shows early warnings in the shorter timeframe, and here we focus on early signals.

The final nail in the coffin is the bearish engulfing candlestick pattern that has formed at the very top of the chart. The psychology behind this pattern is that confident bulls open the session on a higher note (compared to yesterday’s green session), to continue the rally. However, the bears take control during the session and hammer prices below the previous day’s low or, in other words, “engulf” the previous day’s candle. The engulfing candle formed yesterday and today’s negative trading session is more in line with the end of an uptrend.

Traders/investors should ensure that all these warnings are at a fairly early stage and therefore have a high probability of being invalidated in the near future. For further confirmation, one could also wait for some warnings to develop on the weekly charts.

Shares of Adani Power are trading down 3.69% at INR 299.9, as of 10.40am IST today. Over the past month, the stock has risen around 10% as much of the gains have been erased over the past two sessions.