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Wednesday, August 11, 2010

Stock Chart Pattern - Tata Steel (An Update)

A detailed technical analysis of the stock chart pattern of Tata Steel in Sep ‘09 showed two tops just short of the 500 mark in Jun ‘09 and Aug ‘09 and a correction down to 416. I had expected the correction to continue based on the weakness in the technical indicators.

The stock did just the opposite. It reversed directions well before it could drop to the 200 DMA, made a series of higher tops and higher bottoms till it closed at 694 in Apr ‘10. A spectacular 544 points (363%) rise from the low of 150 in Mar ‘09.

The not-so-great performance of the company in 2009-10 – thanks to the huge debt burden of the Corus acquisition - weighed on the stock price. A swift plummet below the 200 DMA was finally halted at the long-term support level of 450 – correcting 45% (in 2 months) of the previous (13 months) rise.

A look at the one year closing chart pattern of Tata Steel may explain why the Sensex hasn’t been able to make much headway of late:

Tata Steel_Aug1109

One of the better traded, Sensex constituent stock has grossly underperformed in the past 4 months. After rising above the 20 and 50 DMAs, as well as a long-term support-resistance level of 528 the stock made an attempt to clear the 200 DMA and another long-term support-resistance level at 562.

All it managed was a small, head-and-shoulders pattern from which it broke downwards today (Aug 11 ‘10). The strong volumes reflected market expectation of poor Q1 results (to be announced tomorrow). If the results are disappointing, the stock may drop to the 50 DMA (at 503) and further to the support level of 450.

Any fall below the 500 level can be used for entering this bellwether stock, as domestic operations are doing well and large cash inflows are likely to kick-in due to substantial revival of the Corus operations in Europe.

The technical indicators are looking somewhat bearish. The slow stochastic has dropped below the overbought zone. The MACD is positive but has crossed below the signal line. The RSI has fallen sharply below the 50% level towards the oversold zone. The consolation for the bulls is that the RSI rarely spends much time inside the oversold zone.

Bottomline? The stock chart pattern of Tata Steel has stayed below the 200 DMA for the past 3 months. If you believe in the long-term growth story of the Indian economy, the lowest cost steel producer in the country can’t remain stagnant for long. Use dips to accumulate.

8 comments:

harkara.blogspot.com said...

subhankarji: excellent study and narration of Tatasteel chart:

Pl keep posting such views regularly so that decisions may be taken timely. Regards

deep said...

Hello Sir!
Thanks a lot for your technical analysis

Subhankar said...

@hbc: Appreciate the kind words.

@deep: Thanks for your comment.

shailendra said...

Subhankarji's answer for couple of my doubts on on Tata Steel .. posting for ref :
Hi Shailendra
In all cyclical stocks - whether commodities or commercial vehicles - you can generate more wealth by selective trading. That doesn't mean you have to buy all the stocks at the bottom of the cycle and sell them all at the top. That would be a miracle because exact tops and bottoms are very difficult to identify.

The trick is to acquire the best stocks in small lots and then hang on to them till opportunities for trading present themselves. If you look at the Tata Steel long-term chart, you will note that it usually trades between 300 and 600. Only on rare occasions does it fall below 300 or rise above 600.

A thumb rule is to choose the mid-point of the range - which is 450 - and try to buy when the stock is trading between 400 and 500. Say, 25 or 50 shares each time it is within the 'buy zone' (and as your savings may permit).

If the stock falls below 300, start to buy larger lots and stop when the stock moves above 300. If the stock rises above 600, don't sell, but maintain an 8% trailing stop-loss and ride the bull rally. Sell a decent quantity - not all - if the stop-loss is hit.

If you can follow this strategy in a patient and disciplined manner with only 3 or 4 stocks - like Tata Steel, Tata Motors, Hindalco, Reliance - you will gradually build up a strong foundation for long-term wealth creation. The other benefit of staying invested is the occasional 'free' bonus shares and rights shares at discounts to the market price.

In short, follow a buy-and-hold strategy with long-term trading.

Subhankar


--- On Sat, 8/28/10, shailendra gaur wrote:


From: shailendra gaur
Subject: Re: The E-Book.
To: "S Ghose"
Date: Saturday, August 28, 2010, 11:24 AM

Dear Mr. Subhankar,

One doubt I had read .. steel is a commodity .. and I have read that the only way to make money is to
buy when the commodity cycle is at the bottom and sell at the top. And, that by keeping commodity
stocks for long time one does not make much money... due to the cycle/plant maintenance cost etc.

This raises two questions -
1. Where/how do I find the commodity cycle charts (ex- for steel)? Or, is it implicit coz economy is up,
market is up, so bottom is passed long back. (a year ago?)

2. Then, is it worth keeping Tata Steel for long time, if it should be sold at peak of cycle.
Please comment.
Regards,
Shailendra

From: S Ghose
To: shailendra gaur
Sent: Tue, August 17, 2010 4:03:51 PM
Subject: Re: The E-Book.

Thanks for the kind words, Shailendra.

I am a long-term holder of Tata Steel and never invested in Sesa Goa - so my opinions will be biased! Both are good stocks to own.

Tata Steel is a manufacturer of steel that owns captive iron ore mines. Sesa Goa is a pure iron ore mining company. The two can't be compared. To choose between one over the other, you have to look at the fundamentals. So check the RoE, RoA, cash flows from operations, debt/equity ratio, dividend yield, etc. and then decide. As far as the management is concerned, it is your call who you trust more - the Tatas or the Agarwals.

Both stocks have corrected from their recent peaks. Usually acquisitions are value-destructive in the short-term. Tata's Corus acquisition led to a fall in the stock price. But now, Corus profits are beginning to kick in. Debt is still high, but reducing.

Sesa Goa has good cash reserves and may not indulge in huge borrowing to fund the deal. The government may or may not approve the stake sale. Other buyers may throw their hats in the ring - thereby pushing up the acquisition price. You may want to wait for the deal contours to take shape before entering.

Subhankar

shailendra said...

Subhankarji's answer for couple of my doubts on on Tata Steel .. posting for ref :
Hi Shailendra
In all cyclical stocks - whether commodities or commercial vehicles - you can generate more wealth by selective trading. That doesn't mean you have to buy all the stocks at the bottom of the cycle and sell them all at the top. That would be a miracle because exact tops and bottoms are very difficult to identify.

The trick is to acquire the best stocks in small lots and then hang on to them till opportunities for trading present themselves. If you look at the Tata Steel long-term chart, you will note that it usually trades between 300 and 600. Only on rare occasions does it fall below 300 or rise above 600.

A thumb rule is to choose the mid-point of the range - which is 450 - and try to buy when the stock is trading between 400 and 500. Say, 25 or 50 shares each time it is within the 'buy zone' (and as your savings may permit).

If the stock falls below 300, start to buy larger lots and stop when the stock moves above 300. If the stock rises above 600, don't sell, but maintain an 8% trailing stop-loss and ride the bull rally. Sell a decent quantity - not all - if the stop-loss is hit.

If you can follow this strategy in a patient and disciplined manner with only 3 or 4 stocks - like Tata Steel, Tata Motors, Hindalco, Reliance - you will gradually build up a strong foundation for long-term wealth creation. The other benefit of staying invested is the occasional 'free' bonus shares and rights shares at discounts to the market price.

In short, follow a buy-and-hold strategy with long-term trading.

Subhankar


--- On Sat, 8/28/10, shailendra gaur wrote:


From: shailendra gaur
Subject: Re: The E-Book.
To: "S Ghose"
Date: Saturday, August 28, 2010, 11:24 AM

Dear Mr. Subhankar,

One doubt I had read .. steel is a commodity .. and I have read that the only way to make money is to
buy when the commodity cycle is at the bottom and sell at the top. And, that by keeping commodity
stocks for long time one does not make much money... due to the cycle/plant maintenance cost etc.

This raises two questions -
1. Where/how do I find the commodity cycle charts (ex- for steel)? Or, is it implicit coz economy is up,
market is up, so bottom is passed long back. (a year ago?)

2. Then, is it worth keeping Tata Steel for long time, if it should be sold at peak of cycle.
Please comment.
Regards,
Shailendra

From: S Ghose
To: shailendra gaur
Sent: Tue, August 17, 2010 4:03:51 PM
Subject: Re: The E-Book.

Thanks for the kind words, Shailendra.

I am a long-term holder of Tata Steel and never invested in Sesa Goa - so my opinions will be biased! Both are good stocks to own.

Tata Steel is a manufacturer of steel that owns captive iron ore mines. Sesa Goa is a pure iron ore mining company. The two can't be compared. To choose between one over the other, you have to look at the fundamentals. So check the RoE, RoA, cash flows from operations, debt/equity ratio, dividend yield, etc. and then decide. As far as the management is concerned, it is your call who you trust more - the Tatas or the Agarwals.

Both stocks have corrected from their recent peaks. Usually acquisitions are value-destructive in the short-term. Tata's Corus acquisition led to a fall in the stock price. But now, Corus profits are beginning to kick in. Debt is still high, but reducing.

Sesa Goa has good cash reserves and may not indulge in huge borrowing to fund the deal. The government may or may not approve the stake sale. Other buyers may throw their hats in the ring - thereby pushing up the acquisition price. You may want to wait for the deal contours to take shape before entering.

Subhankar

shailendra said...

subhankarji: BTW, one thing I forgot to mention earlier and just remembered. My mistake.
1. When price of Tata Steel is low/high, it implies that earnings/potential earnings
are also low/high and market is responding to it .. although not perfect.

Now, Peter Lynch has mentioned in "Beating the Street", Chapter 15 that it is
better to buy a cyclical when the PE is high compared to when it is low ..
bit confused due to the contrast ...

Subhankar said...

Thanks for your comments, Shailendra.

Haven't read Peter Lynch's book, but this is what typically happens in cyclical stocks: at or near the bottom of the cycle, the smart money starts to buy, pushing up the share price and the P/E. Earnings take a while to catch up. Near the top of the cycle, smart money starts to bail out, depressing prices and lowering P/E ratio.

You can check the historic P/E ratios to find out the range in which the stock trades, and decide on buy-sell decisions. That is the fundamental approach. I had mentioned the technical approach of doing the same thing in my email - which you have already posted.

shailendra said...

Thank you subhankarji !