Amazon deals

Thursday, September 29, 2011

Stock Chart Pattern – Cairn India (an update)

In my previous post about the stock chart pattern of Cairn India a year back, the overseas promoters were trying to offload the company to the Vedanta group. A lot of water has flown down the Ganges since then, but the Vedanta group has still not been able to complete the Cairn acquisition. 30% owner ONGC raised objections regarding royalty payment, and the deal has been going around through various government departments. Every time it seems that the deal is nearing completion, some one throws a spanner in the works.

Recently, the shareholders voted for the proposal of royalty sharing with ONGC, followed by ONGC agreeing to provide a no-objection certificate subject to a binding legal agreement between the two owners on royalty sharing. Only a few minor procedures and approvals are left for the deal to finally conclude successfully.

A different problem has now cropped up. Several members of the top management at Cairn India, including the CFO, have left the organisation recently. Apparently, professional managers were apprehensive of working with Vedanta's Agarwal. In a specialised business like oil exploration, loss of top management staff may hamper future prospects.

How have the procedural delays regarding the acquisition and exit of top management staff affected the stock's price? The one year bar chart pattern of Cairn India shows that the damage has been substantial: 

The stock price had started correcting after touching a high of 368 in Aug '10. The correction continued till the stock price fell sharply to a low of 285 in Nov '10, well below the rising 200 day EMA. The recovery was equally sharp, but the price momentum slowed down and the stock price reached a lower top of 347 in Jan '11. Another bout of correction dropped the stock below its 200 day EMA once more, but to a higher bottom of 306 in Feb '11.
This time, the stock sailed past its previous top to a new high of 372 in Apr '11, but formed a 'diamond' reversal pattern that marked the end of the bull market. The 'diamond' can be thought of as a head-and-shoulders pattern with a bent neck line that has measuring implications. From the break out point - usually downwards - the stock price is expected to drop at least the same amount as the height of the 'diamond'. In this case, about 40 points.
Note that after breaking down below the 'diamond', the stock consolidated for more than a month between support from the 200 day EMA and resistance from a horizontal line drawn through the right apex of the 'diamond'. Eventually, the stock broke below the 200 day EMA on Jun 17 '11, and quickly reached its downside target over the next two trading sessions.
A recovery followed, and the stock managed to climb above the 200 day EMA on intra-day basis, only to face resistance from the horizontal line through the apex of the 'diamond'. Such 'coincidences' make technical analysis interesting. The bears decided enough was enough. Heavy selling dropped the stock deep inside a bear market, where it touched a low of 250 in Aug '11 - a 32.8% correction from the peak of 372.
A rally took the stock past its falling 20 day and 50 day EMAs, but fell short of the falling 200 day EMA. The stock is trading below all three EMAs and is in a bear market. The technical indicators are looking quite bearish. The MACD has crossed below its signal line into negative territory. The ROC has fallen steeply below its 10 day MA into negative territory. The RSI has dipped below the 50% level after reaching its overbought zone. The slow stochastic has descended from its overbought zone, and is below its 50% level.
Bottomline? The stock chart pattern of Cairn India is suffering due to technical and fundamental headwinds. If you are holding the stock, use any rise to exit. New entrants should await the acquisition deal to go through, and the stock to form a bottom. The Vedanta group has acquired a few companies in the metals and mining sector, but have no experience in the oil exploration business. Keep that in mind if you are contemplating an investment.

No comments: