Wednesday, November 9, 2011

Stock Chart Pattern - State Bank of India (An update)

The stock chart pattern of State Bank of India was last analysed more than two years back. A lot of water has flown down the Ganges since then, and the fortunes of India’s biggest public sector bank has almost waxed and waned with the river’s tides.

A change of guard at the top brought with it sweeping changes in some of the lending policies. The very popular but financially disastrous teaser home loan rates were scrapped. Cleaning up the balance sheet meant a one-time hit on the bottom line. The bad news came at a time when the overall market had begun correcting after a 20 months long bull run.

The effect on the stock’s price was dramatic, as the bears went on a vicious rampage. The stock not only dropped into a bear market, but lost more than 50% from its Nov ‘10 peak. Let us have a look at the 2 years bar chart pattern of State Bank of India and analyse whether it is a good idea to enter this beaten down stock:


The stock touched a new high of 2500 in Oct ‘09 – a full 100 points higher than its bull market top of 2396 in Jan ‘08. A corrective move followed; the stock’s price dropped more than 25% to a low of 1863 in Feb ‘10, and looked ready to enter a bear market. But the 200 day EMA provided strong support throughout Feb ‘10, and positive divergences in the technical indicators led to a strong bull rally.

The stock’s price struggled to move above its previous top of 2500 through most of Jul ‘10. A break out on a volume spurt in Aug ‘10 propelled the stock to an all-time high of 3515 on Nov 8 ‘10. Unfortunately, it turned out to be a ‘reversal day’ (higher high, lower close) that signalled the end of the bull rally. That wasn’t the only warning signal.

Note that all four technical indicators reached lower tops (marked by blue arrows) as the SBI stock touched its all-time high. The combined negative divergences also pointed to a correction – if not a trend reversal. Interestingly, the MACD formed a head-and-shoulders reversal pattern with a downward-sloping neckline during Aug through Nov ‘10.

The confluence of bearish signals had a disastrous effect on the stock’s price, which crashed to a low of 1709 on Oct 5 ‘11 – a 51% correction from its Nov ‘10 peak. Q2 results appeared good at first glance, but not so great on a more detailed look. The stock formed a ‘reversal day’ pattern backed by very heavy volumes today, and may drop down to test and break its Oct ‘11 low.

The technical indicators are turning bearish. The stock has formed a bearish pattern of lower tops and lower bottoms over the past year, and is trading below all three EMAs and the blue down-trend line. The downgrade of the banking sector by Moody’s couldn’t have come at a worse time.

Bottomline? The stock chart pattern of State Bank of India is deep inside a bear market, with no signs of bottoming out yet. If the Sensex has to revive, SBI has to revive as well – but it doesn’t look like a possibility any time soon. If you like the banking sector, look at HDFC Bank or even a Yes Bank. The PSU banks are increasingly looking less attractive.


QI said...

What kind of target you are looking for. You sound very bearish but you have not given any possible target...

Subhankar said...

The immediate downside target is a test of the Oct '11 low of 1722. If that level gets broken, lower targets of 1500 and 1375 are possible over the next three to six months.