Wednesday, December 15, 2010

Stock Chart Pattern - IFCI Ltd (An Update)

The previous update of the stock chart pattern of IFCI Ltd was back in Feb ‘10. The stock was consolidating within an ascending triangle pattern (flat top at 60 and higher bottoms) and I had expected an upward break with a minimum upside target of 70. But I had warned investors that the counter was speculative and not for the faint of heart.

Consolidations within a triangle pattern occurs quite frequently on stock charts but are notorious for being unreliable in gauging the future direction. The general rule for consolidation patterns is a break out in the original direction. If an index or stock enters a consolidation zone after a bull rally, it is expected to move up after the consolidation is over. A consolidation after a correction is usually followed by another down move.

That doesn’t always happen in triangle patterns. However, ascending and descending (lower tops and flat bottom) triangles tend to be more reliable with the break out occurring above (or below) the flat side. Ascending triangles have measuring implications. The difference between the lowest point within the triangle and the flat top is added to the flat top.

The stock had touched a low of 37 in Jul ‘09, dropping 23 points below 60. Adding 23 to 60 gives an upward target of 83. Why then did I mention a target of 70? Because that was a long-term support-resistance level where selling was likely. The bar chart pattern of IFCI Ltd from May ‘09 onwards shows that the stock crossed 70 but fell short of 83:


The ascending triangle pattern was confirmed by the multiple tops at 60 in Sep ‘09, followed by a higher bottom at 41 in Nov ‘09. The stock continued its consolidation on gradually reducing volumes, which is typical of consolidation patterns, till volumes started picking up from Jul ‘10.

The upward break out from the ascending triangle on Jul 16 ‘10 was not accompanied by significantly strong volumes, and led to a sideways consolidation within a rectangle pattern (between 57 and 64) upto the end of Sep ‘10. A high volume break out from the rectangle on Oct 1 ‘10 saw the stock touch a high of 77 on Oct 13 ‘10 followed by a higher top of 81 on Nov 11 ‘10.

Note that all four technical indicators – MACD, ROC, RSI and slow stochastic - made lower tops while the stock moved higher. The combined negative divergences warned of a correction – which came soon and the stock swiftly dropped to 52, giving up almost all the gains it made from the level of 50 back in Feb ‘10. Now you know why this stock is not for the faint of heart!

What next? The stock is consolidating around the level of 60 and the 200 day EMA within another triangle pattern. As per the general rule of consolidation patterns mentioned above, the stock is likely to break down below the triangle. The technical indicators are also looking bearish. If you are still holding, maintain a strict stop-loss of 54 (previous bottom). A better idea may be get out and not go anywhere near this stock again.

Bottomline? The stock chart pattern of IFCI Ltd seems to have enjoyed its few days of limelight and has reverted back to its no-return days. The periodic news about inducting a white knight and getting a banking licence have sustained investor (or should I say speculative?) interest. Far better stocks are available in the financial sector.

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