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Monday, May 12, 2014

Technical updates – Colgate and HUL

FMCG company stocks should find a place in every investor’s portfolio for several reasons – steady performance through bull and bear cycles, negligible debt, tons of cash, consistent dividend payments and predictability of earnings.

There is a downside also. Valuations tend to be high. That makes timing of entry an important factor in overall returns. Those who are not comfortable about timing entry or exit can start a SIP – but the plan needs to be continued over the long term to reap benefits.

Two of the best stocks in the FMCG sector are Colgate and Hind Lever. The charts show that both are currently quoting well below their all-time highs. Both companies continue to perform well – but as often happens with FMCG stocks, they have their own bull/bear cycles that do not coincide with market cycles.

Colgate

Colgate_May0914

Colgate’s stock touched a peak of 1580 on Jan 1, ‘13 but formed a ‘reversal day’ pattern (higher high, lower close) and started correcting. It subsequently touched two lower tops and dropped to 1190 on Aug 28 ‘13 – a correction of 25% from its peak that pushed it into a short bear market.

The stock has since been in an up trend, and after returning to bull territory rose quickly to touch a high of 1489 on Apr 25 ‘14. But strong resistance from the down trend line (in blue) has dropped the stock to its 50 day EMA.

Technical indicators are looking bearish. MACD is positive, but falling below its signal line. (MACD has formed a ‘cup and handle’ pattern that has bullish implications.) ROC has crossed below its 10 day MA into negative territory. Slow stochastic is dropping swiftly towards its oversold zone. Only RSI is showing bullish signs by bouncing up from its 50% level.

A test and possible breach of the down trend line is likely.

HUL

HUL_May0914 

The chart of HUL is dominated by a huge upward ‘gap’ of about 47 points that occurred on Apr 30 ‘13 when news about a buy-back at 600 hit the market. After consolidating sideways below the 600 level for a couple of months, the stock price spiked up on strong volumes to touch a lifetime high of 725 on Jul 24 ‘13. But it formed a ‘reversal day’ pattern and started correcting.

Note how the ‘gap’ zone has provided strong support to the stock during the past 5 months. Even if the ‘gap’ gets filled – which looks unlikely at this stage – the stock price is likely to resume its up move thereafter.

Technical indicators are looking quite oversold. All three EMAs have converged together. A sharp move is likely to follow. Which direction? No prizes for guessing correctly!

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