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Wednesday, March 3, 2010

Stock Chart Pattern - Tata Motors

Before delving into the technicals of the Tata Motors stock chart pattern, here is a brief recap of what has been going on in this 65 years old stalwart company from the house of Tatas.

Starting out as a locomotive manufacturer, it got into road rollers and then commercial vehicles. 'Tata trucks', initially of one size and subsequently in different shapes and sizes, became synonymous with 'strong and sturdy'. Then came the shift towards passenger vehicles.

First came SUVs like the Safari and Sumo. Then the Indica - which was a lemon when it was first launched, and the development costs caused the company to get into losses. The stock price dived into double digits.

A modified Indica, and its derivatives - the Indigo and Marina - started selling better. Then came the much-hyped announcement of the 'peoples car' Nano - and suddenly things took a turn for the worse again.

The Singur land acquisition fiasco forced the company to shift its manufacturing facility from West Bengal to Gujarat, causing delays in production and deliveries as well as technical glitches. Then the ill-timed and costly takeover of the Jaguar-Land Rover marquee vehicles pushed the company back into the red.

Meanwhile, all these di'worse'ifications had to be funded and internal accruals and resources were not sufficient. So the equity and debt started to get bloated. The consolidated results for Q3 ending Dec '09 came as a pleasant surprise. Jaguar has started to make money for Tata Motors

As a long-term shareholder, I had no doubts that eventually the company will extricate itself from the mess and start ruling not just Indian but the global roads. But does that justify the recent buy calls given by several broking houses?

Let us have a look at the 3 years closing chart pattern of Tata Motors to find an answer:-

TataMotors_Mar0310

The bear market for the stock started after it hit the peak of 965 back in May '06 (beyond the range of the above chart). It made a double-bottom at 630 in June and July 2006 and started moving up again. But a test of the previous high fell short at 944 in Jan '07.

The stock then had a long 5-wave correction all the way down to 122 in Nov '08. A cup-and-handle bottoming pattern led to a spectacular 600% rise as the stock made a high of 842 on Jan 5 '10. A correction to 645 on Feb 8 '10 took the stock close to the longer term support level of 630.

The post-budget spike took the stock to an intra-day high of 814 and a close of 807.50 at the end of today's trading. Note that the stock is near the Oct '07 top of 813, which is also on a longer-term support/resistance line.

A correction from the current level will not be surprising, if you take a look at the RSI indicator which is about to enter the overbought zone. The MACD has recently entered the positive zone and is above the signal line, so another 2-3% rise from current levels is a possibility.

After a huge rise, the stock is poised to test its recent high. If a new high is made above the 842 level, expect strong resistance from the 890-965 zone. That zone is just 10% higher. The more likely outcome could be a period of sideways consolidation between 842 and 645.

Bottomline? The stock chart pattern of Tata Motors is near a previous top and close to a strong resistance zone. The high P/E ratio leaves no margin of safety. This is not a time to buy, but to book profits. Stalwart stocks should be bought when the markets hammer them down.

4 comments:

Kenny said...

Fantastic view on Tata Motors.....I believe that this management will put the name of Tata on the lips of Europeans as well as Americans, with great cars made for low prices, just as Hyundai and Kia has done in the last 10 years.

I am also a long long long term holder of this, and multiple decades to hold, to hand off to my kids.

Great writeup and stay invested.....

KKP

Subhankar said...

That is high praise from an investment veteran - not sure I fully deserve it!

There used to be a joke about the Jaguar in the US - you need to buy two, because one is always undergoing repairs!

May be Indian ingenuity and Tata's commitment will turn things around.

shiv said...

sir, ramcharan the noted consultant says the co will go places in3 years
plseebusiness strtegist eco times

Subhankar said...

I have no doubts that the company will prosper in the years to come. The question is: does it justify buying the stock at the current price of 800?