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Thursday, May 2, 2013

Stock Chart Pattern – SpiceJet (An Update)

The previous update to the analysis of the stock chart pattern of SpiceJet was posted back in Sep ‘11 (date marked by grey vertical line at extreme left of chart below). Takeover of the company from financier Wilbur Ross by Kalanithi Maran of Sun TV was followed by the departure of senior management – some of whom were experienced airline industry hands.

Worse was to follow because DMK’s loss in the state assembly elections somewhat negated the political clout of the Maran family. High fuel prices and stiff competition from several private carriers hindered the prosperity of airline companies – despite growth in airline passengers.

Technically, the stock price dropped below the support level of 49 on a volume spurt, and the ‘death cross’ of the 50 day EMA below the 200 day EMA confirmed a bear market. Fall below a support level on strong volumes usually turns the support level into a resistance level for future up moves.

The bar chart pattern of SpiceJet below shows how price charts tend to have ‘memory’ of previous levels:

SpiceJet_May0213

The stock price dropped to an intra-day low of 15.35 on Dec 22 ‘11 – managing to spare itself the blushes of turning into a ‘penny’ stock. A rally, which started along with the broader market and continued for 12 months – culminated with an intra-day high of 50.90 touched on Dec 7 ‘12.

Though the stock breached the 49 level on intra-day basis for a few days, it failed to close above 49. The stock gained more than 35 points (230%) from its Dec ‘11 low – excellent returns within one year. But its failure to convincingly breach the 49 level allowed the bears to return with a vengeance.

After several failed attempts to cross above the 49 level during Dec ‘12 and Jan ‘13, the stock price dropped sharply below all three EMAs and the blue uptrend line – pushing the stock down into bear territory. As often happens when a trend line gets breached, there was a pullback towards the trend line that provided another opportunity to sell.

The stock price dropped to a low of 25.90 on Mar 28 ‘13 – a 50% drop from its Dec ‘12 high, and a 70% retracement of its entire rally from the Dec ‘11 low. A double-bottom reversal pattern and a rally along with the broader market has taken the stock above all three EMAs. However, daily technical indicators are looking quite overbought. Another bout of correction is likely.

Does the price pattern reflect some fundamental change in the company? May be it is just on a hope of better times following the deal between Jet Airways and Etihad of Abu Dhabi that has brought some life back into the struggling airlines sector. A fall in fuel prices has also been positive.

Bottomline? The stock chart pattern of SpiceJet is trying to disentangle itself from a strong bear grip. Upside resistance is expected from the blue trend line and the 49 level. Demise of Kingfisher Airlines has partly reduced competition. But profitability in the airline sector is fleeting. The stock is not investment-worthy, but can be a trading bet due to high-volume price swings.

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