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Wednesday, July 1, 2009

Stock Chart Pattern - Castrol India

The stock chart pattern of Castrol India is a great example of how solid, well-managed market leaders behave through bull and bear periods. It is also an example of why investors should concentrate on individual stocks for their portfolio and not worry too much about the day-to-day fluctuations in the BSE Sensex index chart pattern.

Castrol India has a near 20% share of the automotive lubricants market in India. 70% owned by Castrol, UK, the company has grown steadily albeit slowly - with strong cash flows, regular dividends and negligible debt. The fundamentals justify this as a good long term portfolio stock.

The high cost of oil and the global down turn has affected the performance of the company, and the company had to reduce product prices earlier this year. But the stock price is not showing any adverse effects. The one year bar chart pattern of Castrol India shows some interesting formations that could lead to longer term trading opportunities:-

Castrol_Jun3009

The stock made a 52 week low at Rs 234 on July 4, '08 and then entered a 'pennant' (or, wedge-like) formation, which indicates a 'continuation' pattern. Since the stock chart pattern entered the 'pennant' formation from below, the likely breakout is in the upward direction.

The stock did break out on higher volumes on June 17, '09 and hit Rs 399, which beat its previous high of Rs 374 made on Dec 31, '07. Since then it has been consolidating within a triangle pattern.

Three times during the 10 month long continuation pattern, the stock made higher tops while both the RSI and slow stochastic made lower tops. On the first two occasions - in Sept '08 and Jan '09 - the stock followed these negative divergences with corrections that lasted over two months. Both times it took support on the lower edge of the 'pennant'.

Is the pattern likely to repeat this time around as well? It might. Then again, it might not. This is what makes technical analysis so exasperating. If you sell the stock - rest assured it will probably go up!

So what is a small investor supposed to do? Look for other signals. Notice how the 50 day EMA has been supporting the stock for the past two months? It should support any corrective fall at 340 level. If the 50 day EMA fails, then the lower edge of the pennant should support at 320 level.

The other thing to watch will be the small triangle being formed after the recent upward breakout from the pennant. A break upwards may get resisted at the previous high of 400. Clearing which it could go to 450.

Bottomline? The longer term chart pattern of Castrol India made a low of Rs 154 on June 14, '06. It has been in a bull market for 3 years. Wait for the budget. Any adverse news may pull the stock down. Pick up a small quantity then.

PS: I haven't commented on the MACD and OBV indicators. What do you think they are signalling? Bullish? Bearish? Neutral?

7 comments:

Rishi said...

Subhankarji,

The MACD above zero and above the signal line indicates a bullish pattern. Please correct me if my understanding is wrong.

Thanks
Rishi

Lalchand Khatri said...

Rishi is saying correct...you are not wrong...
Mini Index Forecasting

Subhankar said...

Yes, Rishi and Lal.

MACD is indicating bullishness. But did you observe the negative divergence? Lower tops than those made in Aug/Sep'08 while the stock is making higher tops?

The OBV is tracking the stock price - as it is supposed to do. That means there continues to be buying interest.

rk77 said...

Castrol has crossed 615 after a brief dip to below 600. Will it continue its bull run?

Subhankar said...

Good question, Dr K.

600 was the previous top. A drop to that level before moving up means the bull market continues.

The stock is at an all-time high and there are no upper targets. But keep a trailing stop-loss if you enter now.

joel said...

Hi Sir,
Castrol Has just anounced bonus shares, due to which the stock price is currently at 360-375 odd level's, Do you think it is a good buy at current level's?

Subhankar said...

Castrol is one of those stalwart stocks that can be bought at any price.

It is in a long-term bull market and trading near its all time high (on a cum-bonus basis). You can buy a small quantity with a stop-loss at 340.