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Friday, January 25, 2013

Stock Chart Pattern – Cairn India (an update)

Shortly after the previous update on the stock chart pattern of Cairn India was posted (on Sep 29 ‘11 – marked by grey vertical line on the extreme left of chart below), the stock price formed a small double-bottom and rallied above all three EMAs to touch an intra-day high of 325 on Nov 9 ‘11.

But it turned out to be a ‘reversal day’ (higher high, lower close), and the stock corrected below all three EMAs – only to touch a higher bottom before continuing upwards in a zig-zag move over the next 3 months that culminated with a new intra-day top at 401 on Feb 22 ‘12.

Again, it turned out to be a ‘reversal day’ (higher high, lower close), and the stock price has since been consolidating within a ‘pennant’ (narrow triangle) pattern. Will the stock price of Cairn India be able to break out of the ‘pennant’ pattern any time soon? In which direction?


My recommendation to readers in the previous update had been: “If you are holding the stock, use any rise to exit.” If you had heeded my advice and sold out on the first rally to 325 in Nov ‘11, you would have missed out on the rally to 401. So, it wasn’t such great advice – specially from the short-term point of view. But for long-term investors, the recommendation wasn’t so bad. The stock closed today’s trading at 323.45 – a bit lower than the level touched on Nov 9 ‘11.

Triangle patterns tend to be unreliable, because the direction of the eventual break out can be up or down. However, there is one ‘rule’ about triangles (rules generally don’t work in technical analysis) that seem to work most of the time. A break out usually occurs after the stock price touches each of the upper and lower boundaries twice.

On the Cairn India chart, note that the upper boundary was touched in Feb ‘12 and Sep ‘12, while the lower boundary was touched in Jun ‘12 and Dec ‘12. That means the stock price should be ready for a break out at any time. But in which direction?

Throughout the month of Jan ‘13, the stock price has been attempting to break out upwards. In fact, on Jan 22 ‘13, the stock price broke out upwards when it touched an intra-day high of 350. But it turned out to be another ‘reversal day’ (higher high, lower close), followed by a drop below all three EMAs.

What happened? Apparently, the market wasn’t particularly excited by Cairn India’s Q3 results though on a QoQ basis they have turned a loss to profit. It is a capital intensive company that needs to ramp up its production substantially. This is a stock meant for investors with high risk tolerance and a really long-term outlook.

Daily technical indicators are bearish and looking a little oversold. The stock price may try to bounce up, but may not be able to break out upwards. It may continue to consolidate within the ‘pennant’ and eventually pass through the apex of the ‘pennant’ and negate the triangle pattern.

Bottomline? The stock chart pattern of Cairn India has been consolidating within a narrow triangle (‘pennant’) for the past 11 months. Business has started improving, but there is still a long way to go. Small investors interested in the oil and gas space may be better off investing in the stocks of established players like RIL, ONGC or Oil India.


Jasi said...

Oh God, the end is nigh! You are recommending investment in RIL? :)

Subhankar said...

Touche, Jasi.

Trying to make the point that an established player (RIL) is a better investment than a company still trying to find its feet (Cairns).