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Wednesday, February 23, 2011

Stock Chart Pattern - Indian Hotel (An Update)

The previous update of the stock chart pattern of Indian Hotel – better known as the Taj Group – was back in Apr ‘10. In Jan ‘10, the stock price had reacted from 110, which was the 50% Fibonacci retracement level of the bear market fall from 180 to 35. The correction took the stock below its rising 100 day EMA.

A double-bottom at 85 in Feb ‘10 was followed by a resumption of the up move, with some high volume spikes in Mar ‘10. However, technical headwinds led me to make the following comments:

‘If it can move above 110, it is likely to face resistance at 120 - the May '08 high. The 61.8% Fibonacci retracement level of the bear market fall is at 125… Those investors who heeded my advice to enter the stock at 65-66 and are still holding, can book partial profits if the stock hesitates near the 110-125 band. Long-term investors can keep a stop-loss at 100 and stay long.’

Knowledge and interpretation of technical analysis can be really helpful, and the bar chart pattern of Indian Hotels for the period Jan ‘10 to Feb ‘11 is a clear example:

Indian Hotels_Feb2311

Note that the stock rose smartly to test the resistance from the 110 level in Apr ‘10. Five days in a row, it breached the 110 level on intra-day basis but failed to close above it. A quick drop to the rising 20 day EMA was followed by another failed test of the 110 level. This time the price dropped to the rising 50 day EMA, where it received good support.

An upward break out on good volumes took the stock up to a new high of 118 on May 14 ‘10. But it turned out to be a bearish ‘reversal day’. The stock dropped back into the trading band between 85 – 110 without testing the May ‘08 high of 120. That was the trigger for investors to book partial profits, because the stock failed to breach the resistance zone between 110 – 125.

On May 26 ‘10, the stock price closed at 99 – below the 100 day EMA, and the stop-loss level of 100. Investors should have sold their balance holdings at this point. Till the middle of Nov ‘10, the stock traded sideways between the rising 200 day EMA and the 110 level. After the 200 day EMA was breached in Nov ‘10, the ‘death cross’ (marked by the blue oval) in Dec ‘10 confirmed a bear market.

A rally took the stock above all four EMAs in Jan ‘11, but the respite for the bulls was brief. Once the correction resumed, the stock fell sharply below the support level of 85. The subsequent pullback found resistance from the 85 level, and shows how support levels tend to become resistance levels after a breach.

The technical indicators are looking bearish. The MACD is below the signal line in negative territory. The ROC is also negative, but has moved above its 10 day MA. The RSI is at the edge of its oversold zone. The slow stochastic has emerged from its oversold zone, but doesn’t seem to be going anywhere.

Fundamentally, there hasn’t been too much change. Q3 results were a bit disappointing, but not entirely unexpected. The re-branding exercise has been completed. The Taj at Mumbai has resumed full operations after renovations following the terror attack. Expansions are on track, but will require additional funding. The huge debt is a concern.

Bottomline? The stock chart pattern of Indian Hotel is in a bear market. There is good support at 70, and below that, at 55. A bounce up on good volumes from those levels can be good entry points. This company is the crown jewel of the hotel industry, well-managed and in a class of its own - but is strictly for long-term investors.

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