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Tuesday, May 17, 2011

Stock Chart Pattern - Sesa Goa (An Update)

Several interesting technical patterns were observed in the stock chart of Sesa Goa in the previous update back in July ‘10. The stock had been consolidating within a symmetrical triangle after falling from its Apr ‘10 top 0f 493.

Triangles are notorious for being unreliable – a stock’s price may break out upwards or downwards; it can fizzle out through the triangle’s apex, losing any technical significance. But they tend to be continuation patterns.

Since the stock had entered the triangle from above, I had guessed that the likely break out would be downwards. The 15 months bar chart pattern of Sesa Goa shows some more interesting technical phenomena:

Sesa Goa_May1711

‘Normal’ break out points from a triangle occur at about two-thirds or three-quarters of the distance from the base of the triangle to the apex. Some times – but not always – a break down close to the apex will tend to pullback to the horizontal line drawn through the apex, and provide a good opportunity to sell.

Not only did Sesa Goa’s stock price pull back to the horizontal line through the apex in Jul-Aug ‘10, it did so a second time in Oct ‘10 – providing another selling opportunity. In between, two other interesting things happened technically.

The blue circle (in Aug ‘10) indicates the ‘death cross’ of the 50 day EMA below the 200 day EMA – confirming a bear market. Prior to that, the stock had made a ‘panic bottom’ at 312 on very high volumes – falling more than 35% from the peak of 493.

Panic bottoms occur quite often during bear markets. Investors would do well to recognise them as a warning bell for worse to follow. Panic bottoms are almost invariably tested and broken.

Note that after the ‘death cross’ in Aug ‘10, the stock made three unsuccessful attempts to move above the 200 day EMA – forming a bearish pattern of lower tops and lower bottoms. Is it all doom and gloom then? Has the tax on iron ore exports and ban on exports from Karnataka taken the wind out of the sail of this blue-chip company? The good Q4 results certainly don’t indicate that. Once the Petronas and Cairn acquisitions go through, the stock may reach its glory days again.

Observant readers may notice that the MACD, ROC and RSI made higher tops in Apr ‘11 while the stock made a lower top. The positive divergences seem to be helping the stock price to stage a revival.

The MACD is negative and below the signal line. The ROC is also negative, but has climbed above its 10 day MA. Both the RSI and slow stochastic have emerged from their oversold zones, but are well below their 50% levels.

Bottomline? The stock chart pattern of Sesa Goa is showing the effects of fundamental and technical headwinds. This is a good portfolio stock for patient, long-term investors. The best time to buy such stocks is when no one wants them. Buy on a convincing break above the 200 day EMA, with a stop-loss at 255.

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