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Wednesday, June 9, 2010

Stock Chart Pattern - OnMobile Global (An Update)

My previous analysis of the stock chart pattern of OnMobile Global nearly 10 months back was after the stock rose spectacularly from a low of 185 to a high 682, retracing nearly 89% of the bear market fall from 745 to 185.

Technically, a retracement of more than the Fibonacci level of 61.8% means that a new bull market has commenced. The stock was undergoing a correction - not surprising after such a huge rise in a short period of 5 months.

I had expected the levels of 500 and 400 to provide support. Those two levels were previous tops and coincided with the 50 day and 200 day MAs. But the technical analysis went haywire - one more reason why taking buy/sell decisions on the basis of technical analysis alone can be injurious to your wealth.

Let us find out what happened to the stock chart pattern of OnMobile Global from Sep '09 till date:

OnMobile_Jun0910

The chart shows four long-term support-resistance lines at 500, 400, 350 and 257, and I will try to explain their significance below:

  1. The stock made a double-top at 500 in May and Jun '09, and corrected down to its previous tops at 400 made in Oct '08 and Apr '09.
  2. After taking support at 400 and the 50 day MA, the stock price spurted to the high of 682 in Jul '09.
  3. Another correction started. The stock tested support 3 times within a month from the 500 level. On the 4th attempt, the stock broke through the support of 500.
  4. In a waterfall-like drop below the 20 day MA the stock fell to 350 in Oct '09.

What happened? Why did the strong support expected from the 400 level and the 200 day MA fail? This is another example of why a combination of technical and fundamental analysis works to the advantage of investors.

What went wrong fundamentally? Multinationals with deep pockets, like Virgin and DoCoMo, entered the Indian telecom sector and introduced per-second billing rates to an industry already reeling from lower ARPUs.

I had written a post in early Oct '09, when OnMobile Global was trading above the 450 level, suggesting that the stock was still expensive and investors should switch out of the telecom sector. In different investment groups, brickbats were hurled at my bearish outlook.

The stock tested the support at 350 in Nov-Dec '09 before spurting to 543 in Jan '10. But the bears attacked immediately and the stock fell to the support of 350 once again. The lower top and flat bottom at 350 formed a bearish descending triangle, from which a downward break in early May '10 took the stock to a low of 257.

Note that the 257 level coincides with multiple tops during Oct '08 to Mar '09 - when the Sensex was also consolidating in a sideways band. Can 257 provide support to the stock?

The technical indicators are not conducive. All the three MAs are falling and the stock is below them. The RSI is below the 50% level. The slow stochastic has re-entered the oversold zone. The MACD is negative, but above the signal line.

The RSI, slow stochastic and MACD are exhibiting positive divergence - they didn't fall to their recent lows while the stock tested the low of 257. A pullback may happen.

Can the stock fall even further? At its recent low of 257, it retraced 85.5% of the rise from 185 to 682. So, the downside appears limited. If 257 does not hold, the stock may fall to 240. At its Mar '10 EPS of 9, the stock is trading at a P/E of 29. Not cheap by any means. Sales of Rs 364 Crores fell short of their target of Rs 400 Crores by Mar '10.

The real benefit of the overseas tie-ups with Vodafone and Telefonica will accrue over the next couple of years. By 2012, OnMobile expects to more than double its sales. If they can maintain current NPM of 20%, then EPS could treble and make the stock a value buy on a 2 years forward basis.

Bottomline? The stock chart pattern of OnMobile Global is showing the effects of investor apathy for anything related to telecom. The company is fundamentally strong, and can provide significant capital appreciation if they can execute on their overseas orders. A small exposure for patient long-term investors is recommended. Risk-averse investors should stay away.

15 comments:

kaku said...

this stocks earnings are on the rise - Q2 with 25cr

Net sales shot up 37.9% to 115cr from 83.4cr (YoY).

is it approaching a good buy status at 290

Subhankar said...

The stock's fundamentals are good, but the earnings have fallen below market expectations.

After forming a bearish rounding top, the stock is falling like a stone and has slipped below all three EMAs (which are also falling).

Wait for the stock to find a bottom before entering. The 255-270 band is a support zone.

sg said...

First and foremost - Dude you Rock!

OnMobile has been hovering around this range of 250-280 for last several weeks. It had earlier recovered from 257 to 383, but dropped again primarily because the parent company has been selling shares, while the promoter is pledging his shares to buy the shares sold by the parent company?

1. What do you make of this?

2. Do you have any price target for OnMobile?

3. The business model of this company is excellent and overseas growth has been fantastic as well. 2011E EPS should be about 13 & 2012E EPS should be around 21. At current price OnMobile trades at a P/E of 12-13 2012E, which is not at all expensive.

Subhankar said...

Thanks for your comments.

Insider buying is a positive. It indicates confidence about future performance.

The stock is in a bear market, making lower tops and bottoms since Jul '09. If it falls below 255, it can test its Nov '10 intra-day low of 226.

harrys2011 said...

Can you please help read out the Technical Analysis for OnMobile Global Ltd? I believe you haven't updated it for the last several months now. The stock is at INR 230 (I am stuck at higher levels of INR 285). Do you think the stock will break 225 and head for even lower levels. Do you suggest accumulate/buy/sell now? Appreciate your feedback.

Subhankar said...

The stock tested its Nov '10 low of 226 today (Feb 2 '11). If it drops below, it can test its Feb '09 low of 185.

One can accumulate slowly from current levels with a 2 years time frame. If OnMobile executes on its overseas rollouts - and there is every reason to believe it will - the stock can be a 3-4 bagger.

harrys2011 said...

Hi Subhankar - OnMobile did test the all-time low of 185 and in fact made a new low of 180. It has recovered a bit to 221.

What do you think is in store for the stock now? I am no genius like you but I think the previous supports 225 and 256 will now act as resistance to the upmove.

Do you think OnMobile can reach 256 before resuming the downtrend? Or do you think the upmove will be halted at 225.

Subhankar said...

I'm no genius, Harry. One doesn't have to be one to understand the concept of supports and resistances. Previous supports tend to turn into resistances, and vice versa.

I have no idea if the stock will move up to 256 now or 3 months later. If you have a long-term perspective, it shouldn't matter. Remember to maintain a stop-loss when you buy - in case the stock takes another dive.

harrys2011 said...

Thanks Subhankar. My question actually was do you think OnMobile has found a bottom now? Since earlier you indicated the stock might test the all-time low of 185. It did breach that level and went to 180. Since I cannot read the technical charts I just wanted your opinion. Your opinion is highly valued.

Subhankar said...

The short answer is: Not yet.

The stock has made a new low on intra-day as well as closing basis. The new low is likely to be tested, and may be broken.

Subhankar said...

OnMobile announced 1:1 bonus shares after trading hours on Mar 7 '11. The price spurt on Mar 8 '11 is facing resistance from the earlier support level of 226.

One can buy a small quantity, and add more on a move above 226.

altruist said...

Thank you for your wonderful analysis on onmobile which i was trying to find from quite sometime. I had strong belief in the company fundamentals and the business they are in since hence i am investing in small quantities from Jan 10 (guess not the right time). Currently my avg price is 350. After the downfall of the stock to 185 i started doubting that i made the right decision.

But after reading your article and company announcement of 1:1 bonus share has helped me regain my confidence in the stock.

if possible please help me with this query. that shall i avg at current levels to further bring down my price or stay away till the bonus shares are alloted.

Thanks once again for your wonderful blog, i wished i would have it found earlier. your articles will definitely help me gain more knowledge.

Subhankar said...

Appreciate your comments.

It is not a good idea to average down because you don't know how low a stock can go. However, the bonus announcement is a vote of confidence from the management.

You can add a small quantity now, and add more on a strong move above 226.

The Dark-side Of Life! said...

Subhankarji,

Where do you think the stock is heading given the 'not so favourable' results...now tht the stock has reached new lows...at levels do you think it will completely bottom out..

PS- I am currently holding 800 shares @145..

Subhankar said...

The stock is deep in a bear market with no sign of a bottom yet.

Domestic business is slowing and overseas business hasn't picked up yet.

The company has spent a lot of money on overseas infrastructure and marketing that has taken a toll on profits.

Technical indicators are looking oversold, so a bounce up is possible - but it will be an opportunity to sell. This stock is going to test investor patience and conviction.