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Thursday, December 15, 2011

Stock Chart Pattern - Tata Motors (An Update)

The previous analysis of the stock chart pattern of Tata Motors was posted a year back. The stock price had touched an all-time high of 1350 (270 in the chart below after adjusting for a 5:1 split) on Nov 10 ‘10, and after a brief correction down to its rising 50 day EMA, had bounced up sharply. But there were strong technical headwinds – in the form of negative divergences on all four technical indicators, and likely topping out of the Sensex and Nifty. That led to the following concluding remarks:

“Existing holders should stay invested, or book partial profits at any sign of hesitation near 1350. This is not a time for fresh entry.”

The bar chart pattern of Tata Motors is an example of how a bull market in a fundamentally strong, large-cap stock, which is part of the Sensex and Nifty indices, can get affected by a change of trend in the indices:


(Please note that the price levels in the above chart have been adjusted for the 5:1 stock split – marked by the light blue bell in Sep ‘11. So, all price levels mentioned in the year-ago post should be divided by 5 for comparison.)

Shortly after my previous post, the stock rose to a new all-time high of 276.30 (equivalent to 1381 before the split) on Dec 6 ‘10, supported by high volumes - marked by the upper blue arrow. The price dropped quickly to the rising 50 day EMA, only to bounce up to a slightly lower high of 274.40 (equivalent to 1372 before the split) on Dec 22 ‘10. Note the much lower trading volume marked by the lower blue arrow. This satisfied the first criterion of a bearish double-top pattern.

The confirmation of the double-top came when the stock price dropped below the ‘valley’ low of 242.60 (equivalent to 1213 before the split) between the two tops on Jan 7 ‘11. That gave a minimum downward target of 210.80. (Why? The price difference between the second top of 274.40 and the ‘valley’ low of 242.60 is 31.80; the downward target is 242.60 – 31.80 = 210.80.)

The stock fell to the support level of 215 and the 200 day EMA in Feb ‘11, bounced up and then dropped to a low of 208.60 on Feb 24 ‘11 – meeting the minimum downward target. The bulls took the opportunity to start a new rally that reached a top of 260.40 in Apr ‘11. Note that there wasn’t much volume support for the rally, indicating it would not sustain for long. Simultaneously, the technical indicators – particularly the slow stochastic and the RSI – signalled overbought conditions.

This time, the bears were in no mood to relent. The stock price dropped below all three EMAs to the support level of 215 in end-May ‘11. On Jun 2 ‘11, the price fell below the support level of 215, indicating the beginning of a bear market. The ‘death cross’ of the 50 day EMA below the 200 day EMA (marked by light blue circle) three weeks later confirmed a bear market.

A pullback to the support-turned-resistance level of 215 in Jul ‘11 provided the bears with another opportunity to sell. A waterfall-like drop to a low of 139 on Aug 26 ‘11 was followed by a ‘dead-cat bounce’ and then a new low of 137.60 on Sep 13 ‘11 (a day after the 5:1 stock split). A spirited rally saw the stock climbing above all three EMAs to a high of 207.90 on Oct 28 ‘10.

The failure to test the resistance level of 215 was a sign of weakness, and the Tata Motors stock price has drifted below all three EMAs once more. The technical indicators are looking bearish, which means the correction is not over yet. The MACD has crossed below the signal line and is about to enter the negative zone. The ROC has dropped below its 10 day MA and is trying to cling to the ‘0’ line. The RSI is on the verge of slipping below the 50% level. The slow stochastic has fallen sharply below its 50% level.

Gross global sales in Nov ‘11 were higher than that in Nov ‘10. Whether profits have increased proportionately or not will be known only when Q3 results are announced. At its recent low of 137.60, the stock has fallen a huge 50% from its Dec ‘10 peak of 276.30 – underperforming the Sensex by two times.

Is this a good time to start accumulating the stock? Technically, no. There is a good possibility that the Sep ‘11 low may be tested and broken. Even if it doesn’t break the previous low, such a large-cap index stock is likely to consolidate for a while and enter some sort of a bottoming pattern. That would be a better time to start accumulation.

Bottomline? The stock chart pattern of Tata Motors is in a bear market and is expected to test its recent low. Fundamentally strong but beaten down large-cap stocks should find a place in small investor portfolios. If you don’t have the chart reading ability to time your entry, start buying small quantities on dips below 160. But such stocks are meant for long-term wealth building. Don’t expect miracles in the short-term.


chandra shekhar said...

really admirable. your hard work on tatamoter.thank u.please on relcap

LovelyGuy said...

Great analysis. Well said Subhankar.

Subhankar said...

@chandra sekhar: Thanks for your comments.

Rel Cap has been falling for more than 2 years and has dropped below its Mar '09 low. The next supports are at 200, 170 and 150.

@LovelyGuy: Appreciate your comments, Spandan.