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Thursday, June 21, 2012

Stock Chart Pattern - OnMobile Global (An Update)

Small investors who are stuck holding OnMobile Global stocks, may feel like singing an old hit song by Diana Ross and the Supremes, which begins like this: “Nothing but heartaches, Ooh nothing but heartaches, He brings nothing but heartaches…”

Investing mistakes should be used as learning experiences, and remembered so that similar mistakes can be avoided in future. A company in a high growth sector (telecomm), providing value-added software services, promoted by an ex-Infosys whiz, having overseas VC funding, with top global clients, and a strong balance sheet may appear to be the perfect recipe for success. But even for the best of companies, one should maintain a stop-loss.

So, what went wrong? Leadership position and profits in the domestic business were leveraged to expand overseas. Unfortunately, timing went awry. Competition and lower ARPUs in the domestic market led to a drop in business. Regulatory issues exacerbated the problem. Large expenditure in overseas roll-outs could not immediately cover the revenue and profit gaps. Depreciation and increased taxes ate up profits as well.

Is there no chance of recovery for the stock? From its Jul ‘09 peak of 341 (adjusted for 1:1 bonus) to its recent low of 33.80, the stock has lost 90%. Mid-cap and small-cap stocks rarely, if ever, recover from such huge falls. Even if they do, it may take several years. That is the bad news – and a good reason to avoid the stock.

The good news is that overseas business now accounts for 45% of total revenues, compared to 27% a year ago. In the current year, overseas business will contribute more than 50%. That should add considerably to top and bottom lines, and help the company to turn around.

OnMobile_Jun2112 

The daily bar chart pattern of OnMobile Global is an example of what a 3 years long bear market looks like – all three EMAs moving downwards, with the stock trading below the three EMAs. The stock appeared to find a bottom at 54 and rallied to touch 84 in Feb ‘12. Though it managed to close above its 200 day EMA on a couple of days, it failed to move higher. This is why ‘sell on rise’ should be a strategy in a bear market.

The subsequent fall hesitated near the previous support level of 54 for a few days during Apr and May ‘12, before the stock resumed its downward journey. A high volume spurt today saw the stock close just above its falling 20 day EMA. Positive divergences in all four technical indicators, which touched flat or slightly higher bottoms as the stock touched a lower bottom (marked by blue arrows), may cause an up move towards the falling 50 day EMA. The 54 level is expected to act as a resistance in case the stock crosses above its 50 day EMA.

Note that technical indicators have corrected oversold conditions, but are yet to turn bullish. MACD is entangled with its signal line in negative zone. ROC has crossed above its 10 day MA to touch the ‘0’ line. RSI has moved up to its 50% level. Slow stochastic is rising towards its 50% level.

Bottomline? The stock chart pattern of OnMobile Global is trying to find a bottom. But a long bear market doesn’t reverse in a day. Await the formation of a reversal pattern to enter. A more prudent move will be to wait for a convincing break out above 84. But remember that the stock will test the patience of most investors.

5 comments:

Bhaskar Jain said...

Subhankar da,

Would love to hear more about your thoughts regarding this - "But even for the best of companies, one should maintain a stop-loss."

For a general long term investor who is holding fundamentally good companies and does not need the capital now, what should be the criteria for stop loss if company has some short term pain. Should it be a fixed number like 25% down from buying price or something like below 200 EMA etc.

Subhankar said...

A stop-loss prevents a smaller loss from turning into a bigger one. Whether the stop-loss should be a fixed percentage or a fixed amount in Rs. or a technical support level depends on an investors risk tolerance and skill.

You may like to read Chapter 2 of my eBook at this link:
http://subhankar-investmentebooks.blogspot.in/2012/01/chapter-2-how-to-lose-less-with-stop.html

Subhankar said...

Heartaches continue at OnMobile:

http://www.medianama.com/2012/06/223-onmobile-fraud-arvind-rao/

Subhankar said...

Some large exits and entries at OnMobile:

http://www.vccircle.com/news/telecom/2012/07/02/onmobile-globals-largest-institutional-investor-sells-48-stake-scrip-hits

Subhankar said...

The low-down on the sordid Arvind Rao saga - and why OnMobile may be a value-pick at CMP:

http://forbesindia.com/article/boardroom/why-arvind-rao-and-onmobile-went-down-a-dark-road/33420/0