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Thursday, August 25, 2011

Stock Chart Pattern - Tata Chemicals Ltd (An Update)

A technical update on the stock chart pattern of Tata Chemicals was posted exactly one year ago. The stock had closed at 396 after touching a high of 412 on Aug 19 ‘10. The technical indicators were looking overbought, and I had expected a correction.

A look at the one year bar chart pattern of Tata Chemicals reveals three stock market ‘truths’:

  1. Stocks can remain overbought (or oversold) for long periods
  2. ‘Higher they climb, harder they fall’
  3. Fundamentally strong stocks in boring businesses are better portfolio picks than glitzy momentum stocks.

Tata Chem_Aug2511

The stock price did correct a bit, but only down to its rising 20 day EMA, where it received good support and resumed its up move – which continued for another two months. Note that the stock rose to touch a new high of 441 on Oct 28 ‘10, but three of the four technical indicators reached lower tops – indicating negative divergences.

The new high was also touched on a ‘reversal day’ (higher high, lower close), but not supported by strong volumes. However, the combination of negative divergences with the reversal day was a warning signal that the bull run was coming to an end. This was confirmed two days later by a volume spike as the stock dropped below both its 20 day and 50 day EMAs.

As often happens with sharp falls, there was an upward bounce that gave exit opportunities to savvy investors. A roller-coaster ride followed, as the stock dropped below the 200 day EMA in Dec ‘10, jumped up to almost reach its Nov ‘10 high in early Jan ‘11, and then sunk like a stone below the 200 day EMA down to 302 in Feb ‘11. The stock corrected 31.5% from its Oct 28 ‘10 peak, significantly underperforming the Sensex (which corrected about 18% from its Nov ‘10 high to its Feb ‘11 low).

It is interesting to see what happened next. While the Sensex formed a bearish descending triangle pattern from which it has broken downwards well below its Feb ‘11 lows, the stock price of Tata Chemicals has been consolidating within a rectangular sideways pattern well above its Feb ‘11 low.

Through the month of Aug ‘11, the stock price has been struggling to remain within the rectangular pattern. But the bears appear to be getting the upper hand. The technical indicators are looking bearish.

The MACD is entangled with its signal line in negative territory. The ROC has dropped below its 10 day MA into negative zone. The RSI emerged from its oversold zone, only to face resistance from its 50% level and has turned down. The slow stochastic is falling towards its oversold zone. The 50 day EMA is about to cross below the 200 day EMA, and confirm a bear market.

Bottomline? The stock chart pattern of Tata Chemicals has fought a brave battle against the bulls so far, but is about to lose ground. If you are still holding, keep a strict stop loss at 330. Use the subsequent dip to accumulate.

2 comments:

Jasi said...

Sir,

Thanks for the detailed analysis.
A question - "keep a strict stop loss at 330. Use the subsequent dip to accumulate."

Are you suggesting to sell-off once it reaches 330 and then buy again at a lower price?

Appreciate your hard work!

Subhankar said...

That is correct, Jasi.

What strategy one uses depends on one's holdings and entry price. If you have 100 shares @ 250, you can sell it all and re-enter at lower prices. If you have 1000 shares @ 100, you can sell 400-500 and buy them back at 250.