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Wednesday, July 7, 2010

Stock Chart Pattern - Sesa Goa (An Update)

The previous analysis of the stock chart pattern of Sesa Goa was written in Aug '09 at a time when the stock was taking a breather after a splendid rise from its bear market low. The stock had closed at 218 and the technical indicators were hinting at some more correction.

But the stock was near its 50 day MA, a likely support. Coupled with the strong fundamentals - high margins, strong cash flows from operations, good sales growth, regular dividends, low debt - led me to conclude as follows:

'The stock chart pattern of Sesa Goa is showing some weakness. Investors can use the opportunity to enter by buying small quantities at every dip.'

Let us have a look at the 1 year bar chart pattern of the Sesa Goa stock to see how this iron ore export company is faring:

Sesa Goa_Jul0710

There are several technical points worth noting. I will cover them one by one starting from the bottom left to the top right of the chart.

The bearish 'rounding top' formation during Jul and Aug '09 saw the stock correct down from 259 to 208 - just below the 50 day MA. The correction retraced only 27% of the rise from 71 to 259, which meant that the bull market in the stock was in tact.

After getting support from the up trend line, the Sesa Goa stock embarked on the next leg of its rally - making higher tops and higher bottoms, and getting support from the 20 day MA, 50 day MA and the up trend line - till it hit 493 in Apr '10.

The correction that followed was forewarned by the MACD and the RSI, which were making lower tops as the stock was making higher ones. The stock subsequently entered a 'symmetrical triangle' consolidation pattern.

Triangles can be fickle - they can break upwards, or downwards, or even fizzle out by moving sideways through the apex. But in this case, the most likely move will be down. Why?

Triangles are usually continuation patterns - which means the break out should be in the same direction that the stock was headed prior to entering the triangle. The stock moved down into the triangle from a top.

The break-out criteria has also been met - touching the falling trend line twice (marked by 1 and 3) and the rising trend line twice (marked by 2 and 4). The stock has not yet reached the apex of the triangle. So, we can expect the stock to break downwards from the triangle soon.

The most important bearish indication is that the 50 day MA has crossed below the 200 day MA - the 'death cross' in technical parlance. Near term down side targets will be the previous tops at 285 and 259.

The technical indicators are bearish. The slow stochastic has entered the oversold zone. The RSI is below the 50% level and sliding. The MACD is below the signal line in negative territory.

Bottomline: The stock chart pattern of Sesa Goa is a good example of how a fundamentally strong stock can turn technically weak. Metal stocks are cyclical and the way investors can make money on them is to do longer-term trading. Book part profits on the break down from the triangle (or on any subsequent pull back) and re-enter at lower price points.

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