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Wednesday, April 28, 2010

Stock Chart Pattern - Dhanalakshmi Bank (An Update)

The stock chart pattern of Dhanalakshmi Bank was taking a well-deserved rest after a rapid climb from the low of 37 in Mar '09 to a high of 119 in Jun '09 - when I looked at it in July '09.

The stock not only outperformed the Sensex but kept up the bullish chart pattern of higher tops and bottoms till it made a high of 178 in Oct '09. The stock then developed a double-top bearish reversal and quickly dropped to 123, retracing 39% of the entire rise from 37 to 178 - close to the Fibonacci retracement level of 38.2%. It is quite amazing how the Fibonacci retracement levels keep acting as support/resistance time and again.

Let us take a look at the one year bar chart pattern of Dhanalakshmi Bank:

Dhanalakshmi_Apr2810 

After getting support at 123, the stock entered a long consolidation in a rectangular pattern between 123 and 155. Today's high just fell short of the upper boundary. Eventually, the stock will break out of this rectangular range.

In which direction? That is a good question. Theory of such consolidation patterns state that the break out will be in the direction of the previous trend. Logically, it should move above 155 on higher volumes.

Why? Because the rise from 37 to 178 was obviously a bull phase, and the 39% correction means that there has been no change of trend yet. What about the double-top at 178 in Oct '09? The lowest level between the two tops was at 154 (which is now acting as a resistance level to the consolidation).

Since the stock fell below 154 and met the lower target of the double-top when it hit 130 (178 - 154 = 24; 154 - 24 = 130), the conclusion is that the bull phase is in tact. So should you buy every time the stock falls near 130?

Only if you are planning to trade the rectangle. An investor should only buy on a clear break above 155. What are the chances of the stock falling below 123? In technical analysis, nothing can be ruled out because past patterns on which such analysis is based do not always repeat.

The MACD is above the signal line and rising in the positive zone. The RSI has dipped from the overbought zone. The slow stochastic is showing a bearish cross (%K below %D), but has not dropped from the overbought zone yet. Looks like the stock may remain in the rectangular consolidation band a while longer.

Fundamentally, the bank seems to be performing well - coming out of its shell of a slow regional bank to a more market savvy, growth oriented private bank. However, the indirect Anil Ambani connection is what makes this a slightly risky investment proposition.

Bottomline? The stock chart pattern of Dhanalakshmi Bank has been in a 6 months long sideways consolidation. Wait for a break out to take buy/sell decisions. In the private banking space, Yes Bank may be a better bet because of management pedigree.

8 comments:

scorpio said...

I did not understand the way you calculated the lower value of 130 by subtracting 24.

The previous top was 178 and then the next top is 154, should this be taken as a double top? The reason I ask is when the patterns are forming, its quite difficult to predict if its a double top or not.
One more question - tata motors double top formation - say it goes down again, can we consider that one as a triple top?

Subhankar said...

The first top at 178 was made on Oct 1. The second top at 178 was made on Oct 21. In between the two tops, the lowest level was 154 - made on Oct 6.

Visually, the double top is easy to identify - but the confirmation is only on a downward break below the lowest level between the two tops. The down ward target is calculated as shown.

Triple tops are quite rare. Don't see one forming on the Tata Motors chart yet.

Madhu said...

As usual good analysis.
Just to point out that the bank shares are accumulated by Zee group (Subash Chandra) and not by ADAG. It is just that the current CEO is ex ADAG.
Most of the new recruits in important controller functions have come from Zee group.

Subhankar said...

Thanks, Madhu.

Had heard rumours that the CEO was inducting ex-ADAG employees in his team. There was also talk of Rel. Capital picking up a stake.

Any idea what percentage of shares Subhas Chandra may have acquired?

scorpio said...

Thanks for clarifying. SO for tata motors - the lower stop using this would be about 140 levels? As in just by this theory.
I would put my stop at 777 50 EMA. Would you go for that as a stop?

Madhu said...

Subash Chandra controls it through a group of companies and as per RBI one group cannnot have more than 10% of stake in any bank. So it may be very difficult to estimate his actual holding officially. Inside information is that Subash chandra controls all functions of the bank.

altruist said...

Dear Sir .. dhanlakshmi bank is making lots of news these days with lots of advertizement on the media to improve there image. Currently at 105 is it a good option to buy with 3 months target ..

Subhankar said...

Please read my latest update, posted on Mar 2, 2011.