Wednesday, March 23, 2011

Stock Chart Pattern - Marico Ltd (An Update)

The previous update on the stock chart pattern of Marico Ltd was in May ‘10. The stock had just hit an intra-day low below 100, and the technical indicators as well as volume spikes on down days were pointing to further downside.

But the stock took support from its rising 200 day EMA, and embarked on the next leg of the rally, hitting a new intra-day high of 136 on Jun 30 ‘10. When I wrote the original post back in Jul ‘09, the stock had moved above its Jan ‘08 bull market peak and was looking overbought at 90. Reader Sumit disagreed, and suggested a target of 160 within 2 years. I am not ashamed to admit that Sumit was right – as the one year bar chart pattern of Marico Ltd will reveal:


The stock price corrected from 136 down below the 50 day EMA to 116 on Aug 12 ‘10 – which happened to be a high volume ‘reversal day’ (lower low, higher close). The next rally ended with a sharp intra-day spike to 153 on Oct 25 ‘10 – nearly meeting Sumit’s target.

The stock continued to move higher on a closing basis for a few more days, but the down trend had begun. Note the negative divergences in the technical indicators (marked with blue arrows) – they touched lower tops as the stock reached a higher top.

The down trend appears to have ended with another very high volume ‘reversal day’ pattern on Feb 9 ‘11. The subsequent rally first broke the down trend line on Mar 7 ‘11, followed by a breach of the support/resistance level of 136 on Mar 16 ‘11.

A pullback to the down trend line is in progress. Twin supports from the rising 50 day EMA and the down trend line should make this a possible entry point. Despite the stock spending several trading sessions below the 200 day EMA and correcting more than 25% from its Oct ‘10 peak, a bear market didn’t get confirmed because the 50 day EMA never crossed below the 200 day EMA (‘death cross’).

Both the 50 day and 200 day EMAs are rising again with the stock trading above them, signifying a bull market. The technical indicators are showing some weakness – thanks to the pullback. The MACD is positive but has slipped below its signal line. The ROC has dropped below its 10 day MA into negative territory. Both the RSI and slow stochastic are falling towards their 50% levels after visiting their overbought zones. The stock may consolidate a bit between the down trend line and the 136 level.

Marico Ltd is fundamentally strong, though margins are under pressure. A TTM P/E of more than 32 doesn’t leave any ‘Margin of Safety’. Still, the stock has given more than 25% returns in 10 months – a good reason why small investors should take a serious look at this FMCG company.

Bottomline? The stock chart pattern of Marico Ltd is an example of why FMCG is my favourite sector. Small investors should add such stocks to their portfolios for steady gains and downside protection, instead of running after mythical multibaggers. Existing holders can top up their holdings. New entrants should wait for a convincing break above 136 to buy.


Subhankar said...

Marico has sold its low margin 'Sweekar' sunflower oil brand - which used to contribute about 5% to its top line - to Cargill India.

Sale proceeds will be used to launch new products in the high margin 'Saffola' brand of edible oil.

Subhankar said...

A nice article on Marico's international business: