Wednesday, July 6, 2011

Stock Chart Pattern - Havell's India (An Update)

In the previous update to the analysis of the stock chart pattern of Havell’s India, written a year ago, I had recommended existing investors to hold or book partial profits, and new entrants to wait for a correction. The stock had closed at 661.30 – less than 15% below its Jan ‘08 high of 750; it is better to be cautious near a previous top.

The stock went on to touch a new all-time intra-day high of 892 (or, 446 after bonus adjustment) in Oct ‘10, just prior to the issue of 1:1 bonus shares (marked by the blue bell). Was my recommendation ill-timed? It would appear so – unless you take a look at the one year closing chart pattern of Havell’s India:


Note that the prices have been adjusted following the bonus issue in Oct ‘10. All price levels in the previous update should be divided by 2 for comparison. Existing holders – even those who may have booked partial profits – enjoyed the rise from 330.65 (adjusted for 1:1 bonus) in July ‘10 to 437.60 in Oct ‘10.

The MACD and ROC made lower tops, and the RSI made a flat top as the stock rose to its peak in Oct ‘10. The negative divergences gave early warning of a correction, which got exacerbated after the bonus issue.

Why? Often, investors resort to selling the stocks that they bought at high prices prior to the bonus issue. As the stock went ex-bonus (i.e. halved in value), investors sold at lower prices to book short-term losses to avail tax benefits. Many investors also sell after the bonus shares are credited to their demat accounts, to reduce their holding costs.

Whatever the reasons, the stock fell steeply to close at 293.70 on Feb 10 ‘11 – a fall of 34% from the peak, underperforming the Sensex correction of 18%. The 50 day EMA hardly went below the 200 day EMA – despite the steep fall below the long-term moving average.

Take a look at what happened next. Not only did the correction provide a better entry point to new investors, a ‘V’ shaped recovery took the stock to a new all-time closing high of 441 – recovering all its losses, and outperforming the Sensex.

The stock touched a new all-time intra-day high of 451 on Jun 15 ‘11 – a day after it closed at 441 – but formed a ‘reversal day’ pattern that started another sharp correction below the 50 day EMA.

I have drawn three ‘fan lines’ (numbered 1, 2 and 3) to ‘capture’ the rally and the subsequent correction. So far, the third fan line has provided support, keeping the rally alive. However, a break below may signal a deeper correction. A fall below 294 will confirm a bearish double-top.

The technical indicators are recovering from oversold conditions. The MACD is negative and below its signal line, but is turning around. The ROC is also negative, but has crossed above its 10 day MA. Both the RSI and the slow stochastic are emerging from their oversold zones. Volumes have picked up over the past two days. An upward bounce is in progress.

The company is fundamentally strong, with good cash flows and manageable debt. The management is investor friendly – paying regular dividends and three 1:1 bonus issues in the past 6 years. The Sylvania acquisition should start bearing fruit. Margins are under a bit of pressure. A play on the domestic consumption story and a great stock for a small investor’s portfolio.

Bottomline? The stock chart pattern of Havell’s India is in a bull market. One can buy the dips, but with a strict stop-loss. Watch the third fan line closely; a break below can turn into a deeper correction.


nachiket shukla said...

Hello, I have question on Wipro. It's chart has shown a sImilar v shape recovery. Can you please give your thoughts on if this is a right time to enter Wipro?

Subhankar said...

I don't track Wipro. Are you referring to what happened in June '11?

A quick look at the chart shows a panic bottom and a bounce. Stock looks overbought, and may go down to test - and break - the June '11 bottom of 385 (on the BSE).