Wednesday, September 23, 2009

Stock Chart Pattern - Suzlon Energy Ltd (An update)

The previous analysis of the stock chart pattern of Suzlon Energy was done more than 6 months ago when the stock market was near its nadir. It is time for an update - more so because the stock is back in the news, thanks to a 5% sale of the promoter's stake.

My bias against Tulsi Tanti and his faulty wind mills was laid bare, including a nonsense rhyme from 'Abol Tabol' by Sukumar Ray, in the earlier post. So I will try to refrain from adding insult to injury. But I can't stop myself from asking this question:

'Why and when does a person sell his wife's jewellery?'

If I was a scriptwriter of Hindi movies, I would perhaps come up with a lofty answer - like 'for building low-cost housing for the down-trodden', or, 'for setting up a well-appointed old folks home'. But the logical answer would be:

'When he exhausts all other options to raise money for survival.'

Let us take a look at the 1 year bar chart pattern of Suzlon Energy and find out how the stock has fared in the bull rally:-


The stock was decimated by the bears, falling all the way from a peak of 460 in Jan '08 (adjusted for a 5:1 stock split that changed the face value from Rs 10 to Rs 2) to a low of 33 in Mar '09. A massive 93% fall, that few stocks can survive.

The subsequent sharp rally took the stock up above the 200 day EMA to 146 in Jun '09 - retracing about 26% of the entire bear market fall. A reader had questioned my recommendation to not go anywhere near the stock (though I had suggested that adventurous traders could make a punt, because the 50 day EMA had gone far below the 200 day EMA, indicating oversold conditions).

Smart investors were not fooled by the whopping 340% gain in 3 months from the Mar '09 low, and started booking profits. After managing to keep its head above the long-term average for most of Jun '09, the stock slipped below it in Jul '09. The 200 day EMA has since provided strong resistance to further up moves.

What is more remarkable? Despite the sharp rally, the 50 day EMA - which had moved below the 200 day EMA way back in Mar '08 - has not been able to move above the long-term average. That means, technically, the stock failed to enter a bull market.

Today's (Wed, Sep 23 '09) news about the 5% stake sale has not been well-received by investors. The stock slipped by more than 6%, and closed below both the 20 day and 50 day EMAs. The bears are in control. Every rise can be used to sell.

The technical indicator's are reflecting the weakness in the stock. The RSI is below the 50% level and moving down. The MACD is barely positive, and below its signal line. The OBV is slipping, indicating 'distribution'. The slow stochastic is getting ready to enter the oversold region.

Bottomline? The stock is at a level nearly 3 times higher than where it was 6 months back. But the chart pattern of Suzlon Energy is uninspiring - particularly the volume spikes on down days. A drop to the 75-80 level could be in the offing. A stock every one should avoid.


tax_trp said...

i agree with you completly, i got this share in ipo sold it and never ever touched it again.
i have found two very good companies in my research- WYETH AND VST INDS.
both are debt free with good div yield.
though vst inds is operating with negative working capital.
its in my watch list, your comments please on both the companies.
mansoor panjwani

Bharath said...

I agree with you that Suzlon did'nt took part in this recent rally. Yes, as it has galloped a long way ahead of other stocks in 10-14K rally, probably that might be reason too. I have also noticed that Sun Pharma didnt took part in any of the rally and as can you say that Sun Pharma too have some problems as such ..? May be or not , but I agree that Suzlon is not that soo much reliant company.

Subhankar said...

@mansoor: Wyeth and VST Ind are good stocks, but I do not track them. Given a choice, I'll buy Glaxo and ITC instead - because I prefer to buy the leader or the second stock in a sector or industry.

@Bharath: Good observation in spotting that Sun Pharma has a similar looking chart as Suzlon.

The market doesn't like uncertainty. No one is certain whether Suzlon will be able to get out of the mess of large debt and faulty technology.

There is uncertainty over the FDA investigation of Sun Pharma's USA subsidiary, Caraco. The acquisition of Taro, Israel is stuck in the courts for a long time. Sun Pharma has sunk a lot of money into that acquisition and it isn't clear if and when they will be able to complete the deal.

Madhu said...

Good analysis.
You have said that volume rise when the price falls is not a good sign.
Is the reverse, volume drop when the price falls is a good buying opportunity?

Subhankar said...

Thanks, Madhu.

Higher volume on up days and lower volume on down days is the norm. The opposite, that is low volume on up days and high volume on down days are red flags.

Volume is a supporting indicator - not a primary one. One should look at a number of technical indicators to come to a buy/sell decision.