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Wednesday, May 25, 2011

Stock Chart Pattern - Bharti Airtel (An Update)

The previous update of the stock chart pattern of Bharti Airtel was written way back in Jan ‘10. Prior to that, I had written a post in Oct ‘09 advising investors to switch out of telecom sector stocks. Despite growth in subscribers, low ARPUs, competition from overseas players with money power, and the likely high cost of the impending 3G auction were the reasons for my bearish view at that time.

Bharti’s stock had been an outstanding performer, giving multibagger returns to savvy investors who had entered early. Customer service was the best among the various service providers. The management was aggressive and clued on. But all sectors eventually mature. The fast growth of the early years tend to slow down to more stable and sustainable levels. Bharti was no exception.

The charts began to reflect the ground realities. The stock reached a high of 495 (adjusted for the subsequent 2:1 split) on May 19 ‘09 – thanks to the post-election market euphoria – but failed to test its Oct ‘07 top of 575. After a sharp correction, followed by a sideways consolidation, the stock attempted another rally – only to reach a lower top of 467 on Oct 1 ‘09. Combined with the fundamental headwinds, the weakness in the chart pattern confirmed that worse was to follow.

The bar chart pattern of Bharti Airtel from Jan ‘10 onwards shows that the worst may be over for shareholders, but there are technical hurdles that need to be crossed:

Bharti_May2511

The stock continued to fall below its 200 day EMA after my previous post on Jan ‘10, till it fell below its Mar ‘09 bear market low of 272 and made three bottoms at 254 in quick succession (two in May ‘10 and one in Jun ‘10). An upward spike above the 50 day EMA on decent volumes was followed by a bullish rounding bottom pattern. A high volume spike took the stock above its 200 day EMA.

The subsequent rally reached a high of 376 on Sep 28 ‘10. Note that the ROC and RSI made lower tops (marked by blue arrows) while Bharti’s stock moved higher. The inevitable correction turned into a 6 months long sideways consolidation till Mar ‘11. The sharp rally in Apr ‘11 did not have volume support. The ROC and RSI were making lower tops (blue arrows). The negative divergences once again stalled the rally.

The high volume spike on May 6 ‘11 touched an intra-day high of 400.10 before closing lower than the previous day – a distribution day. The rise from the low of 254 to the high of 400.10 retraced 60.6% of the fall from 495 (May ‘09) to 254 - close to the Fibonacci retracement level of 61.8%. The stock needs to clear 400 convincingly (i.e. by at least 3%), and then cross the previous tops of 467 and 495 before the bulls can regain control.

The technical indicators are not conducive to bullishness. The MACD is positive, but falling below its signal line. The ROC is just above its 10 day MA, and barely positive. The slow stochastic is below its 50% level. Only the RSI is showing some bullishness by rising above its 50% level.

Shareholders who heeded my advice and sold the stock on Oct 7 ‘09 (it touched a high of 367.70 and closed at 358.35) would have made more money even if they kept the cash in a savings account. At today’s closing price of 369, the stock has gained less than 3%.

Bottomline? The stock chart pattern of Bharti Airtel is back in bull territory, but not yet out of the woods. Without a doubt, this is the best stock among the telecom service providers. But its glory days are behind it. As an investor, you always have choices. If you are going to invest in a slow growth, stalwart stock – would ITC or Dabur be better bets?

(My friend, Nishit, didn’t agree with my bearish view about Bharti and wrote a well-argued opposing view: http://investmentsfordummieslikeme.blogspot.com/2010/07/bullish-case-for-bharti-airtel-guest.html. What are your views about Bharti, dear reader? Are you bullish or bearish? Why?)

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