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Thursday, August 4, 2011

Stock Chart Pattern - Tata Steel (An Update)

The previous update to the technical analysis of the stock chart pattern of Tata Steel was posted a year back. The stock rallied strongly from its Mar ‘09 low of 150 to its Apr ‘10 peak of 694, followed by a correction down to 450, and was struggling to escape the clutches of the bears at 520.

Let us have a look at the one year closing chart pattern of Tata Steel, to find out what kind of progress it has made in the past 12 months:

Tata Steel_Aug0411

I had recommended that investors use a drop below 500 to enter the stock. An entry opportunity presented itself when the stock closed just below the 500 level on Aug 25 ‘10. The next leg of the up move started almost immediately, and the stock quickly rose to close at 678 on Oct 6 ‘10 – falling short of its previous closing high of 694.

A correction ensued, during which the stock price fell below the 50 day EMA on several occasions, and in the process, formed a bullish rounding bottom pattern that propelled the stock to a new closing high of 703 on Jan 3 ‘11.

Note that while the stock managed to reach a higher top, all four technical indicators failed to follow suit. The MACD and the RSI touched lower tops, and the ROC and the slow stochastic reached flat tops (marked by blue arrows). The combined negative divergences pushed the stock price into a down trend that has lasted more than 7 months, and has formed a bearish descending triangle pattern.

The closing level of 559 on May 23 ‘11 meant a more than 20% drop from the peak, and the ‘death cross’ (marked by the light blue oval) on May 24 ‘11 confirmed a bear market.

The Tata Steel stock is a component of both the Sensex and the Nifty indices. So it isn’t a great surprise that the stock has formed a descending triangle pattern similar to the ones formed on the Sensex and Nifty charts. The difference is that the price peaked two months later – in Jan ‘11 instead of in Nov ‘10 – so the duration of the triangle is two months less.

Will the stock bounce up from the long-term support of 557, or will it break down below the descending triangle? All four technical indicators are looking bearish, so any bounce up is likely to be temporary. The MACD and ROC are negative. The RSI is below its 50% level. The slow stochastic is in its oversold zone, where it may remain for a while.

The height of the descending triangle from the peak of 703 to the support level of 557 is 146 points. On a break down below the triangle, the stock price can fall to (557 – 146 =) 411. However, there are long-term supports at 500 and 450 levels, and the stock price may turn back from one of those two supports.

Bottomline? The stock chart pattern of Tata Steel is trading below all three EMAs and looks all set to drop below the support level of 557. This is the best stock to own in the steel sector. Any drop below 500 can be a good opportunity to start accumulating again. 


jawaharlal bansal said...

How do you compare long term chart of SAIL Vs Tata Steel?

Anonymous said...

With so much of debt on the books after acquiring Corus and with the outlook for steel demand heading southwards, do you still think it to be an attractive asset to own? Forget about the technicals.

Subhankar said...

@jb: The SAIL chart is a disaster. After making a bearish double top at 258 in Jan '10 and Apr '10, the stock has fallen more than 50% and is deep inside a bear market with no signs of a turnaround.

@nr: The way to make money in the stock market is to buy when a sector outlook is bad, and sell when the outlook improves. When steel demand is heading north and huge cash flows from Corus cleans up TISCO's balance sheet, the stock will trade at 900 or 1000. That would be a good time to sell.

It is unfortunate that small investors don't take the trouble of learning technicals. They would know when to buy and sell, and have much more money in their bank.

Salil said...

Hi Sudhankar,

Now that Tata Steel has fallen to almost 414 levels, technically is there any chance of further free fall? From the above discussion I guess this is good opportunity to accumulate stock.


Salil said...

Hi Subhankar,

My apology I typed incorrect name. Also would like to know your view on Thermax. Seems it is also free fall.


Subhankar said...

No need to apologise for a typo, Salil - but thanks any way.

Any time Tata Steel drops below 450, it is a time to accumulate. Just do so in small quantities because the stock can easily see lower levels.

Please read my Nov '10 blog post on Thermax and my most recent comment on it. All capital goods stocks are facing the bear's wrath - thanks to the high interest rates.

Ajay said...

As you said it is now below 450 levels comfortably. Should we accumualate now. What is the right level to enter.

Subhankar said...

Your question has already been answered in earlier comments.

Learn to identify long-term support-resistance levels. Those provide good entry/exit points.

Remember that it is safer to buy on the way up instead of on the way down.