Wednesday, February 9, 2011

Stock Chart Pattern - Indraprastha Gas (An Update)

In the previous update in Apr ‘10, the stock chart pattern of Indraprastha Gas had met two criteria for a bearish double-top pattern, but had not met the third – a drop below the ‘valley’ of 205 between the two peaks at 248 and 247.

My recommendation for investors was:

‘Existing holders can book partial profits. New entrants can await a likely dip, or buy after a convincing move above 248.’

The one year bar chart pattern of Indraprastha Gas is an example of why small investors should consider such a fundamentally strong, debt free, cash flow positive, dividend paying, well managed company for the long term. That it has a monopoly in gas distribution in Delhi and the NCR region is an added attraction.

Indraprastha Gas_Feb0911

The double top at 248 did not get confirmed because the stock’s price never fell below 205. But investors did get an opportunity to enter when the stock fell to 215, where it received support from the rising 100 day EMA.

Earlier, the 248 level was breached on intra-day basis but continued to provide resistance to up moves till the middle of Jun ‘10. A high volume break out on Jun 17 ‘10 was followed by a pullback to the 248 level, which turned into a support and offered another opportunity to enter.

The stock rose quickly to 303 in Jul ‘10 on solid volume support, and after a brief dip to the rising 20 day EMA, rallied strongly to touch an all-time high of 374 on Sep 7 ‘10. A bearish ‘reversal day’ pattern preceded a correction down to the 303 level and an intra-day low of 295.

For the past 5 months, the stock has been consolidating sideways between 303 and 374, and has traded above the rising 200 day EMA. On Jan 31 ‘11, the stock touched an intra-day low of 296 – where it received support from the 200 day EMA and bounced up.

What next? There are bullish and bearish possibilities, and I’ll discuss both. First, the bullish arguments. Rectangular sideways consolidations are continuation patterns. That means the up trend before entering the pattern should resume. The bulls will take heart from the fact that despite a 21% correction from the top of 374 to the low of 295, the stock is trading above its rising 200 day EMA.

The bears have strong counter arguments. The stock touched a high of 374 again on Jan 3 ‘11, forming a possible double top. A breach of the 200 day EMA and the 295 level can take the stock price down to 248. Note that all four technical indicators reached lower tops when the stock touched 374 a second time. The combined negative divergences can push the stock price lower.

The technical indicators are all bearish. The MACD is below its signal line, and sliding lower in negative territory. The ROC is negative and about to drop below its falling 10 day MA. The RSI has re-entered the oversold zone after spending a few days above it. The slow stochastic found resistance from its 50% level and has turned downwards.

Bottomline? The stock chart pattern of Indraprastha Gas has been consolidating after a fabulous 300% rally from its bear market low of 92 to an all-time high of 374 (which was more than double its previous bull market high of 182 – far outperforming the Sensex). With the Sensex touching lower levels each day, there may be more selling pressure on the stock. Partial profit booking may be prudent. New entrants should bide their time.


Anonymous said...

Hello Sir,

IGL is down more than 40% and close to 200 is this a buying opportunity or fundamentals have changed.

or Investor should avoid IGL just because Govt has come in.


Subhankar said...

IGL is a PSU, so the govt. was always there, but had stayed away from meddling. Now the regulatory authorities have notified that IGL had been charging disproportionately high prices and should refund the excess amount to consumers. The matter is now in the courts.

Technically, the chart has made a gap-down 'panic bottom' at 188. Since panic bottoms tend to get breached, lower levels may be in the offing.

Buying can be considered if the court rules in IGL's favour.