Wednesday, June 8, 2011

Stock Chart Pattern - Castrol India (an update)

The previous write-up about the stock chart pattern of Castrol India was posted back in July ‘09. A lot of water has flown down the Ganges since then, and the chart has formed some classic technical patterns. It is a good time for an update.

This zero debt, profit-making, cash-generating lubricants company requires very little capital expenditure, pays regular dividends and has issued bonus shares several times – the most recent was a 1:1 issue in Apr ‘10. (All price levels in the previous post should be divided by two for comparing with current prices.)

The stock had a spectacular 52 months bull run from the intra-day low of Rs 77 (pre-bonus 154) in Jun ‘06 to the intra-day high of Rs 590.10 in Oct ‘10 – a 667% gain. That was just the capital appreciation. The total dividend payout was Rs 93. Including the dividend – a 787% gain (8-bagger returns!).

While savvy investors have been sitting back and raking in the ‘moolah’, small investors have been running after mythical multibaggers like Suzlon, Punj Lloyd and Bartronics. Let us have a look at the one year closing chart pattern of Castrol India:


Note the classic head-and-shoulders pattern that halted the long bull run. Why classic? Watch the volume action (marked by the thick blue down-arrows). A volume spike when the left shoulder (LS) was being formed; lower volumes during the head (H) formation (which itself ended with an advanced warning sign of a small head-and-shoulders pattern); even lower volumes during the right shoulder (RS) formation.

The volume spike on the day after the break down below the upward-sloping neckline was a sign that worse was to follow. The pullback attempt following the break down from the head-and-shoulders pattern stopped well short of the neckline and entered a bearish rising-wedge pattern.

Interestingly, the bear market rally in Dec ‘10 also ended with a head-and-shoulders pattern where the head itself formed a mini head-and-shoulders pattern. The down-trend finally ended on Feb 25 ‘11 - correcting about 27% from the Sep ‘10 top, shortly after the 50 day EMA crossed below the 200 day EMA (the ‘death cross’).

While the stock price dropped to its 52 week low, all four technical indicators reached higher bottoms (marked by blue arrows). The strong positive divergences gave a signal that the bull market was ready to resume.

The sharp recovery climbed past the 200 day EMA within a month, pulled back to the long-term moving average in end-Mar ‘11 – giving a good entry opportunity, and tested the Sep ‘10 top on a huge volume spike.

Negative divergences in all four technical indicators, which made lower tops, led to a drop down to the rising 20 day EMA. The stock price is completing a bullish rounding-bottom pattern. A likely test and breach of the Sep ‘10 top of 528 can take the stock to its 52 week intra-day high of 590 in the near term.

Will the bears go into hibernation? Very unlikely in the middle of summer. But the technical indicators are not holding out much hope for them. The MACD is positive, and has crossed above the signal line. The ROC is rising in positive territory above its 10 day MA. The RSI is about to enter the overbought zone. Only the slow stochastic is showing some weakness, as it is below its 50% level. All three EMAs are rising, and the stock is trading above them. The bulls are back in control.

Bottomline? The stock chart pattern of Castrol India endured a six months long bull market correction; in spite of the ‘death cross’ and the two months spent below the 200 day EMA, the bears could not take control. Like Colgate, this stock can be added at any price, and most definitely on dips and corrections.


jawaharlal bansal said...

Although I cannot predict tgt of castol in next one year,but it looks like a real performance begger.

Subhankar said...

Predicting stock price or index movements is a loser's game, Dr B.

However, a test of the 52 week peak of 590 is very likely. If it can break above 590 convincingly, it will be at all time high and in 'blue sky' territory. Which means it can rise much further.

VIPAN said...

Dear Subhankar, can u pls analysis the charts of savita oil also which is also in similar space like castrol and totally debt free, good dividend paying for several years and excellent management

Subhankar said...

I don't track Savita Oil. Can't comment on its fundamentals or management.

I understand it makes transformer oil, which doesn't have much replacement demand. Castrol is a multinational and a brand leader in engine oil, with large replacement demand. The two companies can't be compared.

A quick look at the chart shows that the stock is technically in a bull market, but has been moving sideways for a year, giving zero returns.

Subhankar said...

Castrol announces 1:1 bonus shares - again! The previous one was in Apr '10.