Wednesday, April 6, 2011

Stock Chart Pattern - Exide Industries (An Update)

Back in Jun 2010, the stock chart pattern of Exide Industries had outperformed the Sensex by going past its Jan ‘08 bull market high of 91, and was consolidating in a rectangular range between 105 and 128. Consolidation patterns tend to be continuation patterns. That means, the direction in which the stock price was moving prior to entering the consolidation range is resumed after the break out from the range.

Just to make things a little confusing, some times consolidation patterns can be reversal patterns as well, and there is no way of knowing what will happen beforehand. Those who can take some extra risk can trade such ranges. For investors, it is always better to wait for the break out before taking a buy/sell decision.

Let us have a look at the one year bar chart pattern of Exide Industries:


The stock dropped below its rising 50 day EMA and touched its 52 week low of 109 on May 25 ‘10, but stopped short of its rising 200 day EMA. A strong rally, backed by good volumes, quickly moved above the 50 day EMA and cleared the resistance level of 128. The stock went up to touch a high of 137 on Jun 29 ‘10, but it turned out to be a ‘reversal day’ pattern (higher high, lower close).

A pullback below the 128 level found support from the rising 50 day EMA, and the rally resumed with good volume support during July ‘10. Volumes receded during Aug ‘10 as the stock price consolidated within a ‘flag’ pattern (blue parallel lines), but picked up again as the stock embarked on the final leg of the rally.

However, as the stock reached new highs in Sep and Oct ‘10, three of the four technical indicators touched lower tops (marked by blue arrows) - negative divergences that warned of a correction. The stock reached a high of 180 on Oct 12 ‘10 – a 65% gain from the 52 week low of 109 in less than 5 months – but it formed a ‘reversal day’ pattern.

The correction down to the 50 day EMA was swift, but the bulls managed to avert a deeper correction for almost three months by using support from the 50 day EMA. The inevitable happened in Jan ‘11. Selling pressure led to a sharp correction below the 200 day EMA, followed by a strong upward bounce that was resisted by the falling 50 day EMA. This time, the stock fell below the 128 level to an intra-day low of 112 on Jan 31 ‘11 – a big fall of 38% from the Oct ‘10 top. It still remained well above its Jan ‘08 bull market top of 91.

By the time the 50 day EMA fell below the 200 day EMA (‘death cross’ - signalling a bear market) on Feb 16 ‘11, the recovery was well on its way. The stock moved above the 128 level, breached the 200 day EMA intra-day on Mar 4 ‘11, pulled back towards the support/resistance level of 128 and then rose smartly above both the 50 day and 200 day EMAs, back into bull territory.

Today’s (Apr 6 ‘11) intra-day peak of 154 was the exact 61.8% Fibonacci retracement of the fall from 180 (Oct 12 ‘10) to 112 (Jan 31 ‘11). One can expect the bears to put up a fight here. The technical indicators are hinting at that possibility. The MACD is positive and rising above its signal line – but it is a ‘lagging’ indicator. The ROC is positive and well above its 10 day MA, but is turning back. The RSI briefly entered its overbought zone, but has made a lower top. The slow stochastic also entered its overbought zone, touched a lower top, and is reversing. A correction down to the 200 day EMA or 50 day EMA is likely.

Bottomline? The stock chart pattern of Exide Industries has recovered very well after 5 months of correction. It is currently facing technical headwinds, but remains fundamentally strong. Good topline growth, positive cash flows from operations, low debt/equity ratio, regular dividend payments and ample reserves makes this stock an ideal portfolio selection for small investors. The company is a market leader in the auto-ancilliary space, and is a possible bonus candidate. Valuations are not cheap, plus margins are under pressure. Use dips to add.


Jasi said...

Sir, very useful post! thanks a lot.
Just a question, how does amar raja compare to Exide?

Thanks n regards!

Subhankar said...

Appreciate your comments, Jasi.

I don't track Amar Raja, so can't comment. Why don't you compare the two companies as an exercise, and let me know what you find?

Most of the fundamental and technical tools for such a comparison are available on my blog.