Wednesday, January 4, 2012

Stock Chart Pattern - IFCI Ltd (An Update)

The previous update of the stock chart pattern of IFCI Ltd was posted more than a year back. The stock had touched a high of 78 in Nov ‘10, followed by a sharp correction to 50 and appeared to be consolidating within a triangle.

All four technical indicators – MACD, ROC, RSI and slow stochastic - touched lower tops while the stock rose to its high. The combined negative divergences had provided advance warning of a correction. The following comments were made: “If you are still holding, maintain a strict stop-loss of 54. A better idea may be get out and not go anywhere near this stock again.”

The last comment seems almost prophetic when you look at the bar chart pattern of IFCI Ltd:


The negative divergences in all four technical indicators, formed during Oct – Nov ‘10 have been marked by blue arrows. After the sharp drop from the peak of 78 to a low of 50 below all three EMAs in Nov ‘10, the stock consolidated within a bearish ‘rising wedge’ pattern – marked 1 – and rose above all three EMAs.

The break down below the wedge in Jan ‘11 was followed by a pullback towards the wedge, which received combined resistances from the 20 day and 200 day EMAs. Such pullbacks happen often, but not always, as can be observed in the ‘rising wedges’ marked 2 and 4. The stock price dropped to a low of 46 in Feb ‘11 and started forming a slightly prolonged ‘rising wedge’ – marked 2. The ‘death cross’ of the 50 day EMA below the 200 day EMA confirmed a bear market.

‘Rising wedge’ number 2 failed to cross above the 200 day EMA. The stock broke down without a pullback to a low of 44 in May ‘11 before starting a consolidation within another ‘rising wedge’ – marked 3. The break down below ‘rising wedge’ number 3 wasn’t followed immediately by a pullback. It came after 10 days. The subsequent slide went all the way down to 28 in Oct ‘11, before the formation of ‘rising wedge’ number 4.

The sharp break down below ‘rising wedge’ number 4 touched a low of 20 in Dec ‘11. Note that all four technical indicators showed positive divergences by touching higher bottoms – marked by blue arrows – suggesting an upward bounce. Since the stock was deep in a bear market – having lost 75% from its peak of 78 – the bounce wasn’t strong enough to cross above the 50 day EMA, despite solid volume support.

There is every possibility of the stock falling to its Mar ‘09 low of 15. The fundamentals don’t look very encouraging. Hopes of a banking licence has receded. The MD is under scrutiny by the authorities. The government may replace its debt with equity and gain management control. The volatility in the price has turned it into a trader’s favourite.

Bottomline? The stock chart pattern of IFCI Ltd is an example of how mismanagement of operations and finances has enabled the bears to create havoc. Small investors should steer clear of such ‘cheap’ stocks.

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