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Thursday, August 23, 2012

Stock Chart Pattern - Havell's India (An Update)

The previous update to the analysis of the stock chart pattern of Havell’s India was posted back in Jul ‘11 (marked by grey vertical line at the left of the chart below). The stock price was correcting from a ‘reversal day’ pattern after touching an all-time intra-day high of 451 in Jun ‘11.

Since the stock was in a bull market but near a new high, investors were advised to buy on dips, but with a strict stop-loss. A fall below 294 would have confirmed a bearish double-top reversal pattern.

The daily bar chart pattern of Havell’s India provided a good opportunity to buy as the price continued to fall before forming a small double-bottom reversal pattern at 313 in Aug ‘11:


Note that the stock price dropped below its 200 day EMA and dragged both its 20 day and 50 day EMAs below the long-term moving average. The ‘death cross’ of the 50 day EMA below the 200 day EMA technically confirmed a bear market – so how could one buy this particular dip? Was there any certainty that the price would not fall further and drop below 294 – which would be even more bearish?

Those are tough questions that don’t have easy answers. Keen observers may note that the second (slightly lower) bottom on Aug 26 ‘11 was accompanied by slightly higher bottoms in RSI and slow stochastic indicators.

Positive divergences in two of the four indicators wasn’t conclusive evidence of a reversal – but the subsequent rally and the formation of a much higher bottom in Oct ‘11 was a sign that the bulls were regaining control.

The cross above the 200 day EMA on Nov 2 ‘11 on a volume spurt followed by the ‘golden cross’ of the 50 day EMA above the 200 day EMA was conclusive evidence that the bulls were back in control.

Negative divergences in three of the four technical indicators (marked by blue arrows) stalled the bull rally and briefly dropped the stock’s price below the 200 day EMA in Dec ‘11. Note that while the broader market touched a new low in Dec ‘11, Havell’s touched a higher bottom.

The next leg of the bull rally was sharp and coincided with the rally in Sensex and Nifty. After a brief correction down to its rising 20 day EMA in Feb ‘12, the stock price rose to touch a new all-time intra-day high of 616 – nearly doubling in 7 months from its Aug ‘11 low.

However, the stock formed a ‘reversal day’ pattern. The subsequent correction formed a ‘diamond’ reversal pattern (which is like a head-and-shoulders pattern with a bent neckline). A 100 points correction followed, but the stock price has remained above its 200 day EMA.

A second lower top at 614 was touched on Jul 20 ‘12, raising the spectre of a double-top reversal pattern. Once again, three of the four technical indicators showed negative divergences (marked by blue arrows). Technical indicators have corrected from oversold conditions but are still bearish. A test of support from the 200 day EMA is a possibility.

Bottomline? The stock chart pattern of Havell’s India is in a long-term bull market. Periodic corrections and consolidations have strengthened the technical health of the chart. The company is growing well, has strong cash flows, negligible debt and has investor-friendly management – the right combination for the stock to be added to small investor portfolios on dips.

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