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Thursday, February 16, 2012

Stock Chart Pattern - Canara Bank (an update)

The previous post about the stock chart pattern of Canara Bank was back in Oct ‘09. The stock price was correcting after touching a 52 week high. Due to my aversion to PSU stocks in general, and Canara Bank in particular, I had advised investors to look at a couple of other PSU banks.

One of the mistakes that investors often make is failing to perceive the difference between a company and its stock chart pattern. A stock of a fundamentally sound company can perform poorly; another company that may have a weak balance sheet, can shoot up like a rocket for no rhyme or reason.

I am not ashamed to put up my hand up and say: “Mea culpa.”  I allowed a poor opinion of the customer service standards of the bank to cloud my outlook for its stock chart. A look at the three years closing chart pattern of Canara Bank will show how badly wrong I was:


Note the two dark grey vertical lines on the chart – the first marks the date of my earlier post and the second marks the date when the stock touched its all-time closing high of 836 (a whopping 470% gain from its Mar 17 ‘09 closing low of 146 – outperforming the Sensex by a huge margin).

Shortly after I wrote the previous post, the stock price completed its correction by bouncing up from its rising 50 day EMA and then entered a 7 months long consolidation within a rectangle pattern before breaking out in July ‘10. The stock had a parabolic rise over the next 4 months and touched its all-time high of 836. Only the MACD touched a new high. The other three technical indicators - ROC, RSI and slow stochastic – failed to reach new highs.

The negative divergences gave advance signal of an impending correction, which turned out to be a change of trend as the stock fell within a downward-sloping channel for more than a year to touch a closing low of 354 on Dec 28 ‘11. The big fall of almost 500 points (58% from the peak of 836) underperformed the Sensex by more than two times.

The current FII driven rally has seen a strong recovery by the stock, which has risen nearly 55% from the low of 354 – this time outperforming the Sensex by two times. Such a performance – outperforming the Sensex during bull periods and underperforming during bear periods – can be expected from a mid-cap stock, but not from a large-cap stock like Canara Bank.

Note the two blue down arrows on the right hand side of the chart. The top one is pointing to the break out above the downward channel (and the 200 day EMA), followed by a pullback and the subsequent vertical rise. The bottom one is pointing to the sharp upsurge in volumes that accompanied the break out and subsequent rise, thus validating the break out.

Interestingly, the pullback to the top of the channel coincided with declaration of disappointing Q3 results. Net profit fell nearly 21% though income rose by 33% compared to the year-ago Q3. Both gross and net NPAs rose on a YoY and QoQ basis, which is a worrying sign. The technical indicators are looking overbought, but they have looked that way for the past month, and may remain so a while longer.

Bottomline? The stock chart pattern of Canara Bank clearly shows that it performs more like a mid-cap stock – providing large gains during bull phases and big falls during bear phases. Looks like another bull phase has begun. Add on dips, but don’t forget to maintain a suitable stop-loss.


vachas said...

any one who want to study technical analysis if follow subhanker sir for one year will surely will be on foot
no wanted patterns sure shot reliable patterns only included in his all charts

highly educative and informative and reading this blog for over one year has boosted my confidence analytically and how i surely know when to enter and when to exist and if a stock in bearish or bullish orbit.
further what i have noted is that subhankar sir a strict disiciplinarian and this helps one to follow mkt without emotion and enhance value investment.

jacob mathew

Subhankar said...

Appreciate the kind words, Jacob.