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Thursday, February 7, 2013

Stock Chart Pattern - Tata Motors (An Update)

In the previous technical update of the stock chart pattern of Tata Motors on Dec 15 ‘11 (date marked by grey vertical line on chart below), the following comments were made: “Even if it doesn’t break the previous low, such a large-cap index stock is likely to consolidate for a while and enter some sort of a bottoming pattern. That would be a better time to start accumulation.”

The advice was good, but my chart observation wasn’t - I missed the ‘diamond’ reversal pattern that formed during Aug-Sep ‘11, from which the stock price broke out upwards on rising volumes on Oct 7 ‘11.

On Oct 28 ‘11, the stock price rose above all three EMAs to touch an intra-day high of 207.90 – just short of the long-term support-resistance level of 215. For the next couple of months, the stock consolidated within a symmetrical triangle – which turned out to be a continuation pattern, as the stock price broke out upwards on Jan 3 ‘12 on rising volumes.

TataMotors_Feb0713

The resistance level of 215 was crossed on rising volumes – turning the resistance level into a support level for future down moves. After a brief hesitation, the stock price of Tata Motor resumed its up move, and on Feb 15 ‘12 it sailed past its Dec ‘10 top of 276.30 to touch a new intra-day high of 292.

The next leg of the rally touched new highs in Mar ‘12 and Apr ‘12, but all four technical indicators showed negative divergences – MACD and ROC touched lower tops; RSI and slow stochastic failed to touch higher tops (marked by blue arrows) – warning about a possible correction.

A sharp correction dropped the stock price below all three EMAs, but the 215 level provided good support. After a brief upward bounce that failed to cross above the 50 day EMA, the stock price dropped to a lower low of 202.95 on Jul 26 ‘12. However, three of the four technical indicators showed positive divergences (RSI being the lone exception) indicating that the correction was coming to an end.

The subsequent rally took the stock price to an all-time high of 337 on Jan 10 ‘13. This time negative divergences in ROC, RSI and slow stochastic heralded another correction. The stock price dropped sharply but found support from its rising 200 day EMA.

Daily technical indicators are looking bearish to the point of being oversold. MACD is falling below its signal line in negative territory. ROC has crossed above its 10 day MA, but hasn’t entered positive zone yet. RSI has dropped inside its oversold zone, where it doesn’t like to stay for long. Slow stochastic has emerged from its oversold zone but is well below its 50% level.

There have been recent reports of slowing JLR (Jaguar-Land Rover) sales in Europe and even in China. Domestic sales of Indica/Indigo are on a downslide. Commercial vehicle sales – particularly MHCV – have not picked up. However, the dip can be used to add to existing holdings.

Those who feel that the stock price is too high can consider investing in Tata Motor DVR shares (with lower voting rights but higher dividends).

Bottomline? The stock chart pattern of Tata Motors is in a bull market, but facing both fundamental and technical headwinds. However, the correction may be a good opportunity to enter the stock with a stop-loss at 270 (level of 200 day EMA). Such stocks help build long-term wealth, but the investment horizon needs to be long.

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