Are these four railway stocks set for a bullish reversal?

A continuation trend occurs when the market maintains its prevailing direction, whether bullish or bearish. In contrast, a reversal signals a change in direction, marking the beginning of a new trend.

But what if we could combine both approaches—focusing on reversals within the context of a continued trend?

This strategy, often called buying during retracements, leverages the idea that markets experience temporary pullbacks (retracements) even during strong trends. The key challenge lies in determining whether these retracements are complete or still unfolding. However, if a reversal pattern forms within the retracement, it strongly indicates that the original bullish trend is likely to resume.

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To identify such opportunities systematically, I have developed a unique method using Heikin Ashi candles, a noiseless charting technique that simplifies price action, paired with the Relative Strength Index (RSI) to assess the long-term strength of a trend.

Let’s delve into this system for selecting stocks poised for bullish reversals and explore how it can be applied to four promising railway stocks exhibiting potential for such reversals.

Trend confirmation using RSI

To identify long-term bullish trends, the Relative Strength Index (RSI) is applied to a weekly chart spanning 52 weeks. While unconventional, this approach examines the trend over the past year to ensure robustness.

The RSI threshold is set at 55, indicating that the stock must maintain strong upward momentum for at least 29 of the 52 weeks (roughly seven months). Stocks meeting this criterion are deemed to be in a solid bullish phase.

Reversal pattern identification with Heikin Ashi

After confirming the bullish trend, the focus shifts to detecting retracements followed by reversals. A pivotal signal emerges when a Bullish Heikin Ashi candle forms, characterized by an Open=Low pattern. This pattern reflects strong bullish momentum.

The confirmation comes in the following week when the price breaks above the high of the previous Heikin Ashi candle, signalling that the bullish trend is resuming.

Why this approach works

This system’s strength lies in its focus on stocks within long-term bullish trends, entering positions during retracements—typically favourable entry points when stocks are more affordable. While simple in theory, this strategy demands patience and discipline. Traders must wait for retracements and clear reversal confirmations before making their move.

Designed for long-term investors rather than short-term or day traders, this strategy leverages the pullbacks in long-term bullish trends to maximize potential gains.

With this approach in mind, let’s analyse four railway stocks showing signs of bullish reversals.

1. BEML Ltd

BEML Ltd, a public sector undertaking (PSU), specializes in manufacturing equipment for defence, mining, and railways. It is a key player in the Indian railway industry, offering products such as rolling stock (locomotives, coaches, wagons) and spare parts.

With a robust order book and a growing focus on defence production, BEML stands poised to benefit from rising demand in both government and private sectors.

2. Indian Railway Finance Corp.

Indian Railway Finance Corp. (IRFC) serves as the financing arm of Indian Railways, tasked with raising funds to support the development and expansion of railway infrastructure.

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As a prominent player in India’s debt market, IRFC is strategically positioned to capitalize on the government’s significant investments in railway projects, driving long-term growth opportunities.

RailTel is a vital player in the Indian railway ecosystem, specializing in telecommunications and networking services for Indian Railways. It operates one of the country’s largest fibre optic networks, providing high-speed data connectivity across India and playing a critical role in bridging infrastructure and technology.

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4. Texmaco Rail & Engineering Ltd

Texmaco Rail & Engineering Ltd is a diversified engineering company that manufactures various products, including railway wagons, locomotives, and signalling equipment. The company also plays a key role in rail infrastructure development, positioning it well for growth within India’s expanding railway sector.

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Using the trend confirmation system based on RSI and reversal detection through Heikin Ashi candles, we have identified four railway stocks—BEML, IRFC, RailTel, and Texmaco Rail & Engineering Ltd—that show potential for bullish reversals. These stocks, currently in strong bullish trends, offer favourable entry points during their retracements, positioning them as promising candidates for long-term investment.

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This strategy, while requiring patience and a long-term perspective, provides a disciplined approach to trading within strong, sustained market trends. It is particularly effective in sectors like railway infrastructure, which continue to benefit from substantial investments by both the government and private players.

For more such analysis, read Profit Pulse.

Note: This article aims to share intriguing charts, data points, and thought-provoking opinions. It is not a recommendation. If you are considering an investment, please consult your financial advisor. This content is strictly for educational purposes.

About the Author: Brijesh Bhatia brings over 18 years of experience in India’s financial markets as a trader and technical analyst. He has previously worked with renowned firms such as UTI, Asit C Mehta, and Edelweiss Securities. He currently serves as an analyst at Definedge.

Disclosure: The writer and their dependents do not hold the stocks discussed here. However, clients of Definedge may or may not own these securities.