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Wednesday, June 30, 2010

Stock Chart Pattern - Bilcare Ltd (An Update)

Ten months back, the stock chart pattern of Bilcare Ltd was struggling to come out of the bear’s grip, even though the fundamentals of the company remained strong. This is one of the hazards of investing in mid-caps and small-caps. They outperform during later stages of bull markets, but underperform when the bears attack.

I had then concluded my analysis with the following comments:

‘The stock chart pattern of Bilcare Ltd is not inspiring confidence. A fall to the 300-350 zone may be a better entry point for bravehearts.’

The 2 years bar chart pattern of Bilcare Ltd shows that the stock did provide an opportunity for making some short-term gains:

Bilcare_Jun3010

The stock dropped to 330 in July ‘09 and then abruptly changed direction and proceeded on a 9 months long rally, making higher tops and bottoms till it touched 600 in end-March ‘10.

In spite of the smart 82% rise in 9 months, the stock barely managed to retrace 20% of its huge bear market fall from 1830 to 279. As mentioned in my earlier analysis, small-cap stocks rarely recover from such a massive correction.

There are a couple of interesting points to observe in the chart. The stock twice tested its Jun ‘09 high of 549 – once in Dec ‘09 and next in Jan ‘10 – but failed to cross it. It promptly corrected down to its 200 day EMA.

The upward bounce after getting support at the long-term moving average the second time finally cleared the hurdle of the previous top in Mar ‘10. The resistance from 549 turned into a support till the stock made the high at 600.

Why didn’t the rally sustain? Probably a lack of follow-up buying. This is reflected in the negative divergences in the RSI and MACD, which made lower tops as the stock hit a new high.

The correction is going on for 3 months, and both the stock and its 50 day EMA have dropped below the 200 day EMA. Today’s sharp fall was on high volumes and doesn’t augur well for the bulls.

The MACD is in negative territory and below its signal line. The slow stochastic is in the oversold zone. The RSI is ready to drop into its oversold zone. It is possible that the stock may see a bounce up to the 200 day EMA. Use the opportunity to exit, if you haven’t done so already.

Bottomline? The stock chart pattern of Bilcare Ltd had made a brief foray out of the bear market, and is now back again to where it belonged for the past two and a half years. Small investors should avoid this stock.

10 comments:

afzala.com said...

sir your technical anaysis is superb d o u belive in trenanalysis i mean drawing trend line

Subhankar said...

Thanks for your comment.

I do use trend lines often - provided the software has the provision. This particular chart software doesn't allow drawing of trend lines - otherwise I would have drawn one to show that the up trend line has been broken.

Mohan said...

Hello Mr Subhankar,

Firstly thanks for your indepth analysis on Bilcare. I have recently invested in this stock at levels of Rs.365 expecting the stock to go up. I made my investment as the fundametals are very strong for this company and brokerage(HDFC) are also suggesting this. Today i found the stock come down significantly and i want to relook at my investment and would seek your advise on this. I have a long term view on this stock(expecting the Nonclonable technology they are about to bring to the market will provide good business) however if the chart suggests that it will fall to lower levels from here on i am happy to reenter at lower levels. Please suggest.

Thank you.
Best Regards,
Mohan.

Subhankar said...

Appreciate your comments, Mohan.

The stock is fundamentally good but technically weak. It is in a long-term bear market. The way to make money in such a stock is to sell the rises. The recent rally stopped at the falling 200 day EMA, and it is no surprise that the stock has headed down.

If you really want my advice, read the 'Bottomline' in the post.

Mohan said...

Many thanks to you for your valuable suggestion

Mohan said...

Hi Sir,

Latest news is that Bilcare acquired a German company worth 1400 crores for 600 crores which is considered by the market as a good deal. Today the stock has gone up by 10%. Does your view change on this stock. I mean technically did it break out of the range it was in for past few years. Please let me know your thoughts.

Thank you.
Mohan.

Subhankar said...

Fundamentally, the company has around 60-70 Crores cash - so they have to borrow the rest for the acquisition, i.e. about Rs 500 Crores (and raise equity at a premium). Bilcare already had Rs 450 Crores of debt as of Mar '09. That makes a whopping Rs 950 Crores of debt - which will take their Debt/Equity ratio above 2:1. Also, acquisitions are value destructive for small investors - specially in the short term. Just remember what happened with Suzlon.

Technically, it has made a high volume price spike above both the 50 day and 200 day EMAs. Such news driven price spikes are good opportunities to sell. I remain bearish - but I don't own the stock, so it is easier to have a contrarian view!

Mohan said...

Thank you very much for sharing your view on this. I appreciate it.

Regards,
Mohan.

stokpikr said...

I think now it has broken out, watch out

Subhankar said...

The stock has broken out with high volumes, and is looking overbought. At the current price of 623, it hasn't retraced even 25% of its bear market fall. It has made a 'reversal day' pattern at a new high, and technically it isn't out of the woods.

Equity and debt are increasing. Net profit isn't increasing in the same rate. So EPS is going down. The recent acquisition will mean more borrowings. Fundamentals are beginning to get worse.

Looks more like a selling opportunity than a buying one.