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Friday, October 26, 2012

Stock Chart Pattern - Tata Steel (An Update)

The stock chart pattern of Tata Steel has been in a prolonged bear phase ever since reaching a closing high of 703 in Jan ‘11. Shortly after posting the previous update on Aug 4 ‘11 (marked by grey vertical line in the middle of the chart below), the stock price dropped like a stone below the support level of 500 on a volume spurt.

A fall below a support level on strong volumes usually means that the support level will turn into a strong resistance level during subsequent up moves. That is precisely what happened to the 500 level on the closing chart pattern of Tata Steel.

The first attempt at a pullback towards the 500 level in Sep ‘11 faced strong resistance and the stock fell to a lower bottom. The second attempt in Oct ‘11 managed to climb above the falling 50 day EMA, but stopped short at 480. The stock price continued to fall – forming a bearish pattern of lower tops and lower bottoms – till it touched a closing low of 335 in Dec ‘11.

Tata Steel_Oct2612

The subsequent rally coincided with the rally in the broader market. Aided by a couple of strong volume spurts, the stock price rose sharply above all three EMAs and touched a closing high of 495 on Feb 15 ‘12. But resistance from the 500 level was overwhelming.

During Mar ‘12 and Apr ‘12, the stock price consolidated within a bearish ‘rising wedge’ pattern, from which the expected downward break out occurred in early May ‘12. The stock made a ‘U turn’ but could not climb past its falling 200 day EMA. The stock price dropped below all three EMAs but recovered after touching a slightly higher bottom at 350 in Sep ‘12.

So, has the stock formed a bullish double-bottom pattern? The volume action doesn’t suggest that. There should have been a pick-up in volumes after the stock bounced up from the second (higher) bottom. Instead, volumes have slipped, and so has the stock’s price after it faced resistance from the 200 day EMA.

Technical indicators are looking bearish. MACD is still positive, but is falling below its signal line. ROC has crossed below its 10 day MA into negative territory. RSI has dropped below its 50% level. Slow stochastic has entered oversold territory. The stock may move down to test support from the blue line connecting the two previous bottoms.

An upward bounce from the blue trend line, supported by increase in volumes will be bullish. A drop below the blue trend line will be bearish.

Bottomline? The bear phase in the stock chart pattern of Tata Steel is not over yet. Accumulate slowly with a stop-loss at 355. Alternatively, wait for a convincing move above the 200 day EMA to add. Either way, one has to remain patient for the next couple of years to get good returns.


vjraghavster said...

Strong support witnessed around 390 Zone, If 420 Takes off then in a jiffy we might touch 450

Ajay said...

Corus is what making dent to tisco balance sheet. Indian operations is still making money but corus remain a drain. The balance sheet is already taken a one time hit through the good will write off. Things should atleast return to normal on long term! Where to enter is the question. Is it heading for the 2008 low of 150 or so or is it time to average it out or buy new with long term view. Dividend yield is close to 4.5%+ for a blue chip stock. Your feedback is appreicated as always.

Also if you could review BHEL and put your views. Debt free balance sheet and 3+ dividend yield and decent margin in last 5years and so on. Due to near term problems, is the market ignoring this blue chip company? Seek your view on this stock as well!

Subhankar said...

Both TISCO and BHEL are sliding deeper into bear markets.

The prudent move would be to wait for bottoming patterns to form and up moves to resume before considering an entry.