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Wednesday, April 22, 2009

Stock Chart Pattern - DLF Ltd

The stock chart of DLF has formed an interesting bottoming pattern. There are several reasons I don't much care about the real estate sector. Lack of transparency from managements, proliferation of 'black' money in most deals, lack of standards in revenue recognition and accounting, treating consumers like uneducated sheep, are some of them.

My intention is not to sit on judgement, but to interpret chart patterns. I don't like the sector so I don't invest in it. But a lot of individual investors got caught up in the real estate hype, and no stock was hyped up more than DLF in recent memory. (Fortunately there were no 'sub-prime' lending in the Indian markets - otherwise our economy would be in worse trouble!)

Let us have a look at the 6 months bar chart pattern of DLF:-

DLF_Apr2109

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

Can you see the bottoming pattern? No? Take another look at the price chart. Two bottoms were made - one in early Feb '09, the other in Mar '09. These two bottoms helped in forming a nice 'rounding bottom' pattern. The 20 day EMA, which is the short-term smoothened version of the price chart shows a clear saucer-shaped pattern.

The volume confirmation is there as well - an increase in average volumes throughout the upward rally from Mar '09. But there is no need to get excited. It looks like a case of pattern failure. The rounding bottom and subsequent rally should have taken the stock past the strong resistance (from previous tops) at 300 level - where the 200 day EMA has also reached on its downward path.

In spite of the 20 day EMA crossing over the 50 day EMA from below - a bullish sign - the upward momentum wasn't strong enough to carry the stock to the immediate resistance zone. The 'reversal day' last Thursday (Apr 16 '09) and the retreating slow stochastics signalled the end of the up move.

The MACD has flattened (but remember that it is a trend following indicator). Both the ROC and RSI are heading down. I have been cautioning investors for a while that the sharp up move of the past 6 weeks  was a bear market rally which should be used to get rid of non-performing stocks.

Bottomline? If you haven't got rid of your DLF holding yet, you may get one more chance to do so. There is a possibility that this rally is taking a pause before trying to move higher again. But please do not harbour hopes about DLF reaching 1000 levels - not any time soon.

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