Friday, March 17, 2017

Stock Chart Pattern – SpiceJet (An Update)

Let's start with the good news first. Two years ago, Ajay Singh, the original promoter of SpiceJet, reportedly bought the debt-laden and about-to-be-shut-down company from Kalanithi Maran (of Sun TV) for Rs 2. 

The company has seen an upswing in its fortunes since then. Singh engineered a turnaround that moved the company back into the black after several years of losses. Capacity utilisation and on-time performance is one of the best in the domestic airline industry.

Lower oil (and ATF) prices helped in the turnaround. Govt's decision to revamp 50 under-utilised airports and announcement of 100% FDI in domestic airlines should further boost the growth of domestic airlines.

Now, the bad news. All is not well between Maran and Singh, with the former taking the latter to court for transgressions of their sales agreement. An adverse judgement could prove costly for the company.

More importantly - for existing and potential investors - the company's net worth is negative. It may take several years of profitable operations to clean up the balance sheet - which can be a chimera in the airline industry.

The daily bar chart pattern of SpiceJet shows that all the good news has already been discounted in the price. After touching multiple bottoms around 17 during Apr-Jun '15, the stock price shot up to touch a high of 95.30 on Jan 28 '16 - gaining a whopping 460% in 7 months.

All four technical indicators reached their overbought zones. Three of them - ROC, RSI, Slow stochastic - showed negative divergences by touching lower tops (marked by blue arrows). MACD formed a head-and-shoulders reversal pattern.

Bears used the opportunity to attack. The stock corrected more than 40% from its top, but found support at 55 near its rising 200 day EMA. That was a year ago.

Since then, the stock has been consolidating sideways in a 30 points range within a 'rectangle' pattern. The price has moved up to the top edge of the 'rectangle' for the first time since May '16. However, technical indicators are looking overbought. ROC and RSI are showing negative divergences by touching lower tops.

A 'rectangle' is usually a continuation pattern. Since the stock's price entered the 'rectangle' after a correction, the breakout should be downwards. However, a 'rectangle' is an unstable pattern. A breakout can occur in either direction. 

Since the stock is trading above its three rising EMAs in bull territory, the breakout can occur upwards as well. In fact, an attempted upward breakout today was thwarted by bears.

There is a saying about the airline industry: If you want to be a millionaire in the sector, start with a billion. Mallya and Maran have already proved the veracity of that adage.

If you are planning to enter the counter - don't. If you are an existing holder - book out. There are far better sectors to invest in. Which ones? Check out the link below:

Which sectors should you invest in?

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