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Wednesday, January 19, 2011

Stock Chart Pattern - Maharashtra Seamless (An Update)

In my previous update of the stock chart pattern of Maharashtra Seamless almost a year ago, I had made the following observations:

‘On crossing 393, it can move up to 460. On the down side, expect support in the 260-300 zone. This is a good mid-cap stock for long-term portfolios.’

How has the chart pattern played out over the past year? Did it move as per expectations? Is the stock still worth accumulating for long-term portfolios, or has the recent correction beaten it out of shape?

For answers, we need to take a close look at the one year bar chart pattern of Maharashtra Seamless:

Mah Seamless_Jan1911 

The stock dropped below the 100 day EMA to a low of 326 in Feb ‘10 – just above the support zone of 260-300 mentioned. It embarked on a strong rally, culminating in a top at 405 in Apr ‘10. A swift correction found support at the 100 day EMA.

The stock entered a period of sideways consolidation for the next three months, before moving up to touch a new high of 424 in Aug ‘10. Note that throughout the consolidation period, all four EMAs kept on rising, indicating a bull market.

This time the correction went a little deeper, almost to the 200 day EMA. The stock formed a bullish cup-and-handle continuation pattern, from which the upward break out took it to the top of 455 in Nov ‘10 – almost meeting the upside target of 460.

The subsequent correction has been severe, and has pushed the stock into a bear market. Why? For the answer, you will need to go through the four definitions of a bear market in yesterday’s post.

  1. From the top of 455, the stock dropped to a low of 346 on Jan 17 ‘11. Almost a 24% drop, satisfying the first definition of more than a 20% drop.
  2. The 3% ‘whipsaw’ lee-way below the 200 day EMA gives a level of 372. The stock closed below 372 in 8 straight trading sessions. The second definition, of a convincing drop below the 200 day EMA, has been met.
  3. The 50 day EMA is on the verge of dropping below the 200 day EMA (marked by the blue oval), giving a ‘death cross’ that signals a bear market. The fourth definition of a bear market is likely to happen soon.
  4. Only the third definition – a 50% retracement of the entire bull rally (from 115 in Mar ‘09 to 455 in Nov ‘10) – to a level of 285, is yet to be satisfied.

Does it mean that there is some hope for the bulls? The technical indicators are suggesting a likely upward bounce. It may have already happened today. The MACD is negative and below the signal line, but trying to rise. The slow stochastic is trying to move up from its oversold zone. The ROC is also negative, but has moved up almost to its falling 10 day MA. More importantly, it has made a higher bottom. The RSI has emerged out of its oversold zone, and also made a slightly higher bottom.

The higher bottoms in the ROC and RSI indicate positive divergences, because the stock price correspondingly touched a lower low. With three of the four bear market definitions having been satisfied, it may be prudent for investors holding the stock to exit.

Bottomline? The stock chart pattern of Maharashtra Seamless is an example of the perils of investing in mid-caps and small-caps – even if such stocks are fundamentally strong. While they tend to outperform in bull markets, they underperform in bear markets.

3 comments:

best said...

I recently bought small quantity @ 360 for long term may i know next level to buy again or sell on rally.

best said...

Thanks for your Update. please also update for Biocon Which looks very intresting.

Subhankar said...

The stock is trying to find support at the long-term support/resistance level of 345.

Hold with a stop-loss at 330. Add on a move above 365.

Biocon stock is still correcting. Wait for it to find a bottom, or start accumulating if you find value.