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Wednesday, April 25, 2012

Stock Chart Pattern - Indraprastha Gas (An Update)

The previous update (date marked by gray vertical line on the chart below) to the technical analysis of the stock chart pattern of Indraprastha Gas (IGL) was concluded with the following cautionary statements: “… there may be more selling pressure on the stock. Partial profit booking may be prudent. New entrants should bide their time.”

The stock was trading at 310, after correcting from a peak of 374 (reached on Jan 3 ‘11). The correction continued till the stock price dropped below all three EMAs to an intra-day low of 285 on Feb 25 ‘11. The final leg of the spectacular bull run in the stock culminated with a small head-and-shoulders reversal pattern that touched an intra-day peak of 453 on Sep 7 ‘11.

Regular readers may be aware that barring a few exceptions, PSU stocks are not my favourites. Most are not investment-worthy because of their poor performances – whether due to management incompetence or government apathy. The few that do perform well often turn sick because the government either treats them as ATMs to withdraw cash from, or because of decisions that give priority to politics over economics.

Indraprastha Gas (IGL) was one such exception, because of its monopoly status as gas supplier in the Delhi-NCR area, as well as its good growth, low debt and strong cash flows. The past tense suggests that it is no longer an exception. An impractical order by PNGRB, which has since been challenged in court by IGL, has put a huge question mark over the company’s future.

If you thought that the PNGRB order and the subsequent price crash had pushed the IGL stock deep into a bear market, then you will be only partially correct. A look at the bar chart pattern of Indraprastha Gas for the 15 months period from Feb ‘11 to Apr ‘12 will clearly show that the stock was already in a firm bear grip:

Indraprastha Gas_Apr2512

The small head-and-shoulder reversal pattern that formed during Aug-Sep ‘11 was the first signal of a likely change of trend. But that wasn’t the only technical signal to sell. A series of five ‘rising wedges’ – which are bearish consolidation patterns – gave ample opportunities to investors to book their profits.

Note that shortly after the stock price broke down below the 4th rising wedge, the ‘death cross’ of the 50 day EMA below the 200 day EMA (marked by small blue circle) technically confirmed a bear market. The 5th and final rising wedge formed after the technical confirmation.

Even more interesting is the fact that the stock price broke down below the 5th rising wedge on Apr 9 ‘12 – the day before the PNGRB ruling hit the stock market. I can’t think of a better example that proves that technical analysis works, and a combination of fundamental and technical analysis can give investors an edge in the market.

The high volume fall with a big gap on Apr 10 ‘12 – the day of the PNGRB ruling – touched a ‘panic bottom’ at 170, followed by a ‘dead-cat bounce’. A text book example in technical analysis. What is special about 170? It acted as a strong resistance during Aug-Oct ‘10, before the stock price climbed above it. Since panic bottoms seldom hold, the stock price can be expected to fall below 170.

Three of the four technical indicators – MACD, RSI, ROC - reached extremely oversold levels. Not so for the slow stochastic, which is at the edge of its oversold zone. The stock is deep inside a bear market, so all upward bounces are likely to attract selling.

Bottomline? The stock chart pattern of Indraprastha Gas was already in a bear market when the PNGRB ruling caused a price crash. Investors should not rush to enter. Unless the court ruling favours the company, the stock price will not be able to recover its lost glory.

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