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Wednesday, September 2, 2009

Stock Chart Pattern - Tata Steel

Nearly a year back I had last discussed about Tata Steel (I'm learning not to say TISCO). It wasn't a stock chart pattern analysis, though some investment levels were discussed. The big Corus acquisition, as well as other investments in the Asia-Pacific region, were expected to be shareholder value destructive.

No one, including yours truly, expected a fall from 970 on Oct 29, '07 all the way down to 146 on Nov 26, '08 - a massive 85% drop from the peak. Excessive pessimism often allow smart investors to enter fundamentally strong and proven performers at mouth-watering levels.

The dark cloud of the huge debt for acquiring Corus has been broken some what through debt restructuring. Domestic sales have not been affected much, but Corus is still in dire straits. At 50% production levels currently, the losses continue. 75% production is needed for break-even - which is not likely to be achieved before the end of the year.

So 2009-10 will be a bad year overall. Things are likely to improve from 2010-11 onwards, but it won't be till 2011-12 that huge cash flows from the Corus operation will change the stature of Tata Steel in the global steel market.

We'll now have a look at the one year bar chart pattern of Tata Steel and introduce a new technical tool:-

Tata Steel_Sep209

The Tata Steel chart pattern shows a double bottom at the 146-150 level before the bull rally from Mar '09 took the stock to an intermediate peak of 496 on Jun 3, '09 - correcting 42.5% of the entire bear market fall.

Correction to a low of 330 on Jul 13, '09 broke the trend line marked 'OA'. This was a 47.5% correction of the bull rally rise. Note that both corrections - one upward and the other downward - fell short of the 50% Fibonacci level. Another indication that technical analysis is indicative and approximate - more art than science.

From 330, the Tata Steel stock again moved up to test the previous high, but fell short at 492 made on Aug 4, '09 - forming a double-top in the process. The ongoing correction for the past 4 weeks has broken below the 20 day and 50 day EMAs, as well as the second trend line marked 'OB'.

The third trend line, 'OC', hasn't actually formed yet, but has been drawn to indicate the last support possibility for the bull rally to remain in tact - by making the angle BOC the same as angle AOB. These three trend lines - which together look like a small hand fan - form the basis of the 'Corrective Fan Principle'.

The breaking of the yet-to-be-formed trend line 'OC' will signal the end of the bull rally. Before the stock chart pattern can do that, it will need to test the support of the 200 day EMA (currently at 380).

The trend line 'OC' is now at the 300 level, which also happens to be the previous tops made in Apr & May '09. Previous tops tend to act as support levels. That means a good possibility of the stock halting its fall at 300.

The technical indicators are pointing towards more correction. The MACD has entered negative territory. The RSI is about to enter the oversold zone. The MFI is below the 50% level and moving down. The slow stochastic is well inside the oversold region, where it can remain for a while.

Bottomline? The stock chart pattern of Tata Steel may be giving advance notice of what may happen to the BSE Sensex chart - a 10-15% correction. The zone between 300-380 may provide good opportunities for long term investors to enter, or top up existing holdings.

15 comments:

Doctor Universe said...

Dear Subhankarji

Thanks for your update on Tata Steel. I too think we may test 300 levels.

Sorry..I am posting this here...(due to eyestrain)...One more thing I was reading that "grains" (corn etc} may be in for a bullish zone in the coming weeks. Are there any stocks /MFs on these lines of agri commodities. Thanks in anticipation.

scorpio said...

Nice to see a new principle - fan :)
I was looking for the same in tata motors. Double bottom - range of 130 to 136.
Down fall from 670 to 130 - 540 pts down fall
130 to 390 - 260 pts up
I could only make up the first line for the fan, in case the second line to the fan needs to be made by using the trend line - it would be around 370 -390 levels.
Again i dont have the charting tools so I am not able to be accurate :( Just wanted to give it a shot and see how much I could interpret and only learned that there is so much more to learn :D

SG Money Mind said...

Warren Buffett said "We wouldn't have liked those 99:1 odds - and never will. A small chance of distress or disgrace cannot, in our view, be offset by a large chance of extra returns. If your actions are sensible, you are certain to get good results; in most such cases, leverage just moves things along faster.".

Tata Steel management did a disservice buy their aggressive and greedy act and that brought the company to this situation. There is no doubt that the company will bounce back, probably over a period of 4-5 years. Meanwhile I do see a great opportunity to invest the money in some other companies than Tata Steel.

Subhankar said...

@Doc U: Any price below 380 may be a good entry point.

Don't really track agri-commodities. I would avoid the 'ethanol' stories.

@scorpio: The corrective fan lines make sense if the second fan line can be drawn reasonably close to the first one, and has already been penetrated. The Tata Motors chart pattern is way above the second fan line drawn through the July '09 low of 250.

You can visit the rupeeking.com site which is free to use and has several technical tools.

@SGMM: Those are sage words from the Oracle of Omaha - but one has to distinguish between a large acquisition done by a Suzlon, and one by TISCO.

The Corus acquisition was ill-timed, but was less due to greed and more due to survival tactics. The way L N Mittal was grabbing steel companies the world over, the Tatas needed to increase the size of their 'moat'.

The consolidated results should start improving from 2011 - so 2 years rather than 4/5. Steel is a cyclical sector and investments need to be made near the bottom of the cycle. Frankly, I'm biased towards TISCO management and don't find any steel stock that can be considered as an alternative to it.

If you are talking of stocks in other sectors, I agree with you. Better opportunities exist in beaten down sectors - hospitality, for instance.

scorpio said...

Thanks sir, should have seen the charts, it does have the website link as well.

SG Money Mind said...

Steel industry is much more localised. Except for the custom specific products, the general output of the steel industry doesn't have any pricing power, and instead, dependent on the supply and demand factors which determine the price. Thus the moat of any company in this industry lies on the cost effectiveness of its operations. Tata Steel is already a leader in India in that category. Being in that position what they could have done is to replicate the same model within India before Mittal starts his production by 2014.

There is no need to be a leader and among the rank holders for the sake of news wires.

The management should have learnt this trick from the Sterlite group. Look at the way they went about in Balco & Hindustan Zinc.

They could have learnt it from the HDFC which never lost its focus by avoiding foreign territory when it was a fad among every corporate group.

Now that they are in trouble, the management focus is on fire fighting instead of fortifying their moat.

Let me quote Warren Buffett again which is apt in this context "...we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers."

Subhankar said...

TISCO didn't acquire Corus for publicity or ego - but for survival. (The same can't be said about TELCO's JLR acquisition.)

Tatas own minority stakes in many of their outfits, but still run the companies as if they are majority holders. The DIIs play along because of the management's integrity.

A marauding LN Mittal shook the Tatas out of their complacency. So they upped the stakes and became 'too big to be acquired'.

The recent Uttam Galva deal by Arcelor-Mittal confirms that the latter was trying to enter India through an acquisition for some time.

rk77 said...

Tata Steel did not go down but has continued to move up. Considering the previous top of 1000 is it unreasonable to expect it to cross 700? It is hovering around 640-650 these days.With steel prices going up and corus doing better than expected will it be prudent to hold it?

Subhankar said...

Yes, the 'expected' correction hasn't happened. This is the flaw in technical analysis - it is based on previous price history and the future often doesn't behave the same.

TISCO should be a part of all long-term portfolios. Being a cyclical stock, the way to build wealth is to buy lots of it during bear markets and book part profits in bull markets.

When and how much to sell should depend on the state of the market and your asset allocation plan.

rk77 said...

Tata Steel has gone down steadily during last 3 weeks. Is it likely to go down further to 480 or will it bounce back from 530-539 levels? After posting better than expected results the decline seems difficult to understand.

Subhankar said...

Good question, Dr K.

The stock is poised on the uptrend line connecting the Jul and Nov '09 lows. Any break downwards should find support in the 400-500 zone.

A break below 450 can be used to accumulate.

rk77 said...

Dear Shubhankar,
Your technical analysis is amazing. Tata Steel has come down to sub 500 level as predicted by you.

Subhankar said...

Thanks for your comment, Dr K.

I have stopped trying to 'predict' based on chart patterns - I only report what I observe, and discuss about various possibilities.

Pinals said...

Dada any updation on Tisco as you have given your view on Sesa Goa ?

Subhankar said...

Tisco has slipped below a long-term support-resistance line at 495, and is struggling to move above it.

The chart is looking quite bearish. A full update is planned within the next few weeks.