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Thursday, May 17, 2012

Stock Chart Pattern – Voltas Ltd (an update)

In the previous technical update (in Feb ‘11) of the chart pattern of Voltas Ltd., the ‘death cross’ of the 50 day EMA below the 200 day EMA had confirmed a bear market. The technical indicators were looking bearish, and the following observations were made:

“The stock may fall to its support zone of 145-150. If the support doesn’t hold, a drop to 100 is possible. Voltas remains a good stock fundamentally, and lower levels mentioned could be good entry points.”

The daily closing chart pattern of Voltas Ltd. shows how long-term support-resistance levels come into play:

Voltas_May1712

The stock dropped to the support level of 150 in Mar ‘11 about a month after the previous update was posted. Note that the stock touched a lower bottom than the one in Feb ‘11, but all four technical indicators touched higher bottoms. The effect of the combined divergences led to an upward bounce that crossed above the falling 20 day and 50 day EMAs to 186 (in Apr ‘11), but failed to reach the falling 200 day EMA.

That was another warning to exit the stock, because the bears were too strong to allow a trend reversal despite the positive divergences. The stock price twice sought support from the 150 level in May ‘11 and Jun ‘11 and bounced up, only to break downwards in Jul ‘11.

The stock hesitated at the next support level of 100 in Oct ‘11, but again broke downwards in Nov ‘11. A small inverse head-and shoulders reversal pattern formed during Dec ‘11 and Jan ‘12, with the stock price touching a closing low of 72.65 on Dec 29 ‘11 – correcting almost 72% from the double-top reversal of the bull rally in Nov-Dec ‘10.

The rally from the bottom of 72.65 coincided with the rally in the broader market, but instead of peaking out in Feb ‘12 after crossing above the 100 level, the stock price rose briefly above its 200 day EMA to 129.80 on Mar 13 ‘12. A consolidation within a ‘descending triangle’ pattern followed. The expected downward break occurred today as the stock price fell below the triangle and the 100 level to close at 98.85. Can the stock price fall much lower?

The bearish technical indicators seem to suggest a likely test of its Dec ‘11 low. The MACD is falling below its signal line in negative territory. The ROC is negative and falling below its 10 day MA. It has touched a higher bottom, which may cause a brief upward bounce. The RSI and the slow stochastic are both sliding below their 50% levels. There is a small support zone between 92 and 95, which may try to halt the fall.

What ails the company? Like most other stocks that are involved with infrastructure projects, Voltas has lost favour with the investing community. Severe competition in India and West Asia has squeezed margins. Debt has tripled, though the debt/equity ratio remains low. The company took a huge Rs 280 Crores hit in Q3 due to delayed execution of a hospital project in Qatar. The good news is that it was a one-time hit, and the order book has been increasing of late.

Bottomline? The stock chart pattern of Voltas Ltd. is back in a strong bear grip technically, but the fundamentals appear to be improving. Patient and long-term investors may keep a close watch on this company from the Tata group. The adventurous may enter on the current dip, but with a strict stop-loss at 71. Alternatively, wait for the audited full year results and a convincing break out above 130 to enter.

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