Wednesday, March 11, 2009

Stock Chart Pattern - Suzlon Energy Ltd

Today is the second of my stock chart pattern discussions. Last week I had shown the chart pattern of ICI India Ltd.  This week I have chosen the stock chart pattern of a stock I love to hate.

Before delving into the Suzlon chart, let me digress a bit and introduce a small part of a nonsense rhyme written by Sukumar Ray (father of well-known filmmaker, Satyajit Ray). Loosely translated from the original Bengali, it reads something like this:

Once there was a porcupine - in grammar it just could not shine

Turned into a 'duck-upine';  how? I can not determine!

Sukumar Ray, like his son Satyajit Ray, was an illustrator of repute and the above rhyme in the book 'Abol Tabol' (which means complete nonsense) had an illustration of a 'duck-upine' - the front part looked like a duck and the rear like a porcupine.

There have been several 'duck-upine's in the history of Indian industry - the most well-known recent example being Tulsi Tanti. From a relatively unknown background in cold storage, construction, textiles and several other businesses - none of which made him much money - he defied grammar to suddenly turn into a wind energy king, and the fourth richest Indian.

Please don't get me wrong. I have nothing against energetic entrepreneurs trying their luck in different fields. My gripe is against entrepreneurs who adopt dubious means - like reportedly laundering underworld money through an IPO, allegedly creating fictitious projects to avail tax breaks, supplying substandard materials, and technology bought from a loss-making bankrupt company, for export orders.

While no wrongdoing has been proven against Suzlon so far, there has been investigations by authorities and payment of penalty for substandard supplies. As the old saying goes: where there is smoke, there is fire.

Let us take a look at Suzlon's 1 year chart pattern:


(You can right-click on the image above and open it in a new tab or window for a better view.)

After holding on to Rs 250 level till the middle of Sept '08, the stock fell off a cliff to make new 52 week lows in Oct and Dec '08 and then entered a sideways consolidation pattern.

The volumes - overlaid on the price chart - increased significantly during Nov and Dec '08 before starting to taper off from Jan '09. The stock is at a new 52 week closing low of around Rs 34. (Please note that Suzlon is now a Rs 2 face value stock.)

The 20 day EMA is below the 50 day EMA, which in turn is below the 200 day EMA, and all three moving averages are heading down. That means no end in sight for the bear mauling. (If you are not aware of the significance of EMAs, please read the post:

"Why you need to follow the latest trends to become a better investor")

The gap between the 50 day EMA and 200 day EMA is large and increasing. The slow stochastics and RSI are below the '20' line. These indicate that the stock is oversold. MACD and ROC are hovering near the '0' line, indicating indecision.

The spurt in volumes in Nov and Dec '08 - usually caused by accumulation - pulled the stock up to the Rs 70 levels twice. Both occasions were used by smart investors to sell out. Small investors, sensing a 'bargain' and trying to average their earlier higher cost purchases, are now well and truly stuck.

Though the stock is looking oversold, and can make a small bounce up, the fact that it is making new lows on receding volumes indicates that it can go lower.

Bottomline? Investors should not go anywhere near this stock. Adventurous traders may want to make a punt with very tight stop losses.


scorpio said...

Great stuff, was wanting to buy this, but I will still wait.

Subhankar said...

Thanks - but you may have a long wait before this one shows any signs of life!

If energy stocks interest you, NTPC, Tata Power, Neyveli Lignite may be worth looking at.

ekamber said...

subhankar ji
As is usual with you the analysis has been of very good quality, with technical factors elaborately explained, which could be understood by newbie like me also. Nevertheless, I feel it would be proper to complete my comments by stating a bad management in a good field.

Subhankar said...

Appreciate your comment, Ekamber, and agree with you about bad management.

I'm not greatly convinced about 'alternative energy'. Every time oil prices go up, solar power, wind energy, ethanol get hyped up. Soon as oil prices drop, alternative energy goes to the back burner!

Nitin Parashar said...

See your recommendation of not buying did not work.. you can see the price of stock... Analysis does not match with gain in Suzlon stock????

Subhankar said...

Yes, Nitin.

The Suzlon stock has shot up. So has everything else! The incoming tide lifts all boats - small or large. But when the tide goes out? We get to see who has been swimming naked! (That's a Warren Buffett quote.)

Notice that Suzlon is desperately trying to raise cash. Tata Power or NTPC do not have such a problem.