Stock Chart Pattern - Bilcare Ltd (An Update)

In the previous update on Jun 30 ‘10, I had concluded with the following comment: ‘The stock chart pattern of Bilcare Ltd had made a brief foray out of the bear market, and is now back again to where it belonged for the past two and a half years. Small investors should avoid this stock.’

My advice was based on the massive 85% bear market fall (from 1830 in Jan ‘08 to 279 in Mar ‘09). Small-cap and mid-cap stocks – including fundamentally strong ones - rarely recover from such huge corrections. Even if they do, it may take years.

Shortly after writing the post, the stock price slid down further to touch a low of 403.30 on Jul 13 ‘10. This was close to its previous low of 400 touched in Dec ‘09. A ‘V’ shaped rally ensued – which strengthened on increasing volume support and periodic corrections down to its rising 20 day EMA. The previous top of 600 was cleared without much trouble, and the stock price went on to touch a peak of 787.40 on Nov 12 ‘10 – an impressive 95% gain in 4 months!

From reader comments on the previous update, it will become apparent that the reason for the renewed enthusiasm for the stock was the acquisition of a German company at a very attractive valuation. There were also rumours that Rakesh Jhunjhunwala had re-entered the stock, after bailing out earlier.

Did I make a mistake in advising small investors to stay away from the stock? A 95% gain in 4 months is not to be scoffed at. But as a long-term investor, I’m more concerned about protecting capital and sustainability of gains. A look at the 18 months bar chart pattern of Bilcare Ltd. will clarify what I mean:

Note that at the beginning (on Sep 16 ‘10) of the last phase of the bull rally – volumes peaked, and so did the technical indicators. Thereafter, as the stock made higher tops, the volume bars and all four technical indicators reached lower tops (marked by blue arrows).

The negative divergences provided ample warning that the good times were coming to an end. The 18 month peak of 787.40 - touched on Nov 12 ‘10 – confirmed the end of the rally by turning out to be a ‘reversal day’ (higher high, lower close). From the Mar ‘09 low of 279 to the Nov ‘10 high of 787.40 may seem a commendable 182% gain, but it managed to retrace less than 33% of the bear market fall from 1830 to 279. Technically, the stock remains in a long-term bear market that started in Jan ‘08, and the entire move from the Mar ‘09 low to the Nov ‘10 top was a bear market rally.

A swift correction from the Nov ‘10 top pierced the 600 level and dropped well below the 200 day EMA to an intra-day low of 529 on Dec 9 ‘10. That was the last warning for the bulls in the stock to get out. As often happens after such sharp corrections, there was a strong pullback rally that took the stock price above all three EMAs to touch an intra-day high of 703 on Jan 4 ‘11. The pullback provided a good opportunity to sell.

The intermediate top on Jan 4 ‘11 was confirmed by another ‘reversal day’ pattern. This time, the force of gravity proved too strong. After a brief bounce from the 200 day EMA, the stock price desperately clung on to the long-term moving average for a few days before falling back into its long-term bear market.

The MACD and ROC are both in negative territory, but have made higher bottoms and are showing signs of recovery. The RSI and slow stochastic are trying to emerge from their oversold zones. Any rally in the stock’s price is likely to be short-lived. The intra-day low of 389.55 – touched on Mar 28 ‘11 – may be tested and broken. In which case, Bilcare’s stock may fall to 350.

Bottomline? The stock chart pattern of Bilcare Ltd is back in its long-term bear market. Die-hard thrill seekers can look for opportunities to bottom-fish for quick gains. Prudent investors should continue to avoid this stock.