Technical updates – Cairn India and Castrol

After crossing the $105 per barrel mark back in Jun ‘14, WTI Crude oil price fell off a cliff. It touched a low near $40 in Mar ‘15, but bounced up above $60 in May ‘15 – where it consolidated for the next 2 months. Oil’s price has started sliding again.

Lower oil price is good for India’s current account deficit. It is also good for oil marketing companies, and value-added producers like Castrol India. But it is not so good for oil drillers like ONGC and Cairn India.

A look at the 2 years closing charts of Cairn India and Castrol (below) clearly shows which company is benefitting and which one is getting affected by lower oil prices. Cairn India is further hampered by an impending amalgamation with Vedanta.

Cairn India

Cairn India’s stock price touched a 2 years closing high of 382.75 on Jun 10 ‘14 – coinciding with the high touched by WTI Crude oil. It has been in a down trend ever since – failing to match the brief recovery in oil’s price during Mar-Apr ‘15.

In Aug ‘14, the 50 day EMA crossed below the 200 day EMA – the ‘death cross’ (marked by light blue oval) technically confirming a bear market. Since then, all three EMAs have been moving down and Cairn’s stock price is trading below them.

The stock price touched a 2 years low of 165 on Jul 9 ‘15, but three of the four technical indicators – MACD, RSI, Slow stochastic – touched higher lows (marked by blue arrows). The positive divergences can lead to an upward bounce. Use it to exit - in case you are holding the stock.

Castrol

The stock price of Castrol India consolidated sideways with a downward bias from Jul ‘13 to May ‘14 before spiking up with good volumes in Jun ‘14 – about the time WTI Crude oil price started correcting.

The stock closed at a 2 years high price of 532.90 on Dec 5 ‘14, but has been in a down trend (marked by blue down trend line) since then. After slipping below all three EMAs into bear territory, the stock appears to have found a bottom at 427.

The three EMAs are in close proximity of each other – a condition often followed by a sharp price move. Since the stock is trading above its three EMAs in a bull market, the price move is likely to be upwards.

If the stock price breaks out above the down trend line with good volumes, it will be a buying opportunity. If volume is insufficient during the upward break out, expect the stock price to pullback towards the down trend line – which will be another buying opportunity. Keep a stop-loss at 414.

(Note: Castrol’s chart is an example of the benefits of a ‘buy and hold’ strategy for quality stocks. The positive price action happened during 6 months – from Jun to Nov ‘14. The balance 18 months during the 2 years period, the stock price consolidated with a downward bias.)

Stock Chart Pattern - Castrol India (an update)

In the previous update (on Jun 8 ‘11 – marked by grey vertical line on the left of the chart below) to the stock chart pattern of Castrol India, the following were the concluding remarks:”Like Colgate, this stock can be added at any price, and most definitely on dips and corrections.”

The daily bar chart pattern of Castrol India shows the wonderful buying opportunity the stock provided by dropping to a low of 385 in Dec ‘11:

Note the small double-top reversal pattern (labelled T1 and T2) formed back in Jul ‘11 – about a month after my previous post – which marked the end of the 200+ points intermediate rally from the low of 380 touched on Feb 28 ‘11 (not shown in chart). The volume bar on Jul 5 ‘11 during the first top (T1) was much taller than the volume bar on Jul 18 ‘11 during the second top (T2). This satisfied the first condition of a double-top. Once the price dropped below 544 – the ‘valley’ point between the two tops – the second condition for a ‘double-top’ got confirmed. That was the first signal to book profits.

It is not easy to follow these technical signals while they occur. However, after dropping below the 20 day EMA, the stock price bounced up on good volume support to touch a lower top of 569 on Aug 4 ‘11. That gave a stronger signal to book profits. The stock gave additional profit booking opportunities by consolidating within, and breaking down from, two ‘rising wedge’ patterns.

The stock finally stopped falling after touching a slightly higher bottom of 385 in Dec ‘11 (the previous bottom of 380 was touched in Feb ‘11). The subsequent rally initially coincided with the rally in the broader markets, before the stock continued its upward march by forming a bullish pattern of higher tops and higher bottoms. The spike in volumes as the stock crossed its 50 day EMA and 200 day EMA, followed by a pullback to, and upward bounce from, the 200 day EMA provided buying opportunities.

The ‘golden cross’ of the 50 day EMA above the 200 day EMA technically confirmed a return to a bull market. As the stock price rose to touch a higher top in Apr ‘12, all four technical indicators touched lower tops (marked by blue arrows). The combined negative divergences led to a correction and the stock briefly dropped below its 200 day EMA – giving no returns for the 12 months period from the previous post on Jun 8 ‘11.

However, partial profit booking in Aug and Sep ‘11 and buying back in Dec ‘11 and Jan ‘12 would have given decent returns. Such a strategy may not work with every stock, and should not be tried by small investors. But when the stock is a Colgate or a Castrol, then partial profit booking and buying back at lower prices is a great way to enhance returns.

The recent high volume price spike has been due to the announcement of another 1:1 bonus issue in Jul ‘12. The stock price has corrected from an overbought condition after touching an all-time high of 634 on Aug 6 ‘12. The price may correct a bit more, which would be a good opportunity to get in for new investors. A better opportunity may be to wait for a likely price correction after the bonus shares are credited to demat accounts of existing shareholders.

Bottomline? The stock chart pattern of Castrol India took investors on a roller-coaster ride over the past 2 years – swinging between 590 and 380. Those who held on for the ride have been rewarded with two 1:1 bonus share issues - not to forget about the substantial dividends. To build wealth, small investors should concentrate on ‘expensive’ stocks like Castrol and Colgate, instead of chasing after ‘cheap’ mythical multibaggers.

Stock Chart Pattern - Castrol India (an update)

The previous write-up about the stock chart pattern of Castrol India was posted back in July ‘09. A lot of water has flown down the Ganges since then, and the chart has formed some classic technical patterns. It is a good time for an update.

This zero debt, profit-making, cash-generating lubricants company requires very little capital expenditure, pays regular dividends and has issued bonus shares several times – the most recent was a 1:1 issue in Apr ‘10. (All price levels in the previous post should be divided by two for comparing with current prices.)

The stock had a spectacular 52 months bull run from the intra-day low of Rs 77 (pre-bonus 154) in Jun ‘06 to the intra-day high of Rs 590.10 in Oct ‘10 – a 667% gain. That was just the capital appreciation. The total dividend payout was Rs 93. Including the dividend – a 787% gain (8-bagger returns!).

While savvy investors have been sitting back and raking in the ‘moolah’, small investors have been running after mythical multibaggers like Suzlon, Punj Lloyd and Bartronics. Let us have a look at the one year closing chart pattern of Castrol India:

Note the classic head-and-shoulders pattern that halted the long bull run. Why classic? Watch the volume action (marked by the thick blue down-arrows). A volume spike when the left shoulder (LS) was being formed; lower volumes during the head (H) formation (which itself ended with an advanced warning sign of a small head-and-shoulders pattern); even lower volumes during the right shoulder (RS) formation.

The volume spike on the day after the break down below the upward-sloping neckline was a sign that worse was to follow. The pullback attempt following the break down from the head-and-shoulders pattern stopped well short of the neckline and entered a bearish rising-wedge pattern.

Interestingly, the bear market rally in Dec ‘10 also ended with a head-and-shoulders pattern where the head itself formed a mini head-and-shoulders pattern. The down-trend finally ended on Feb 25 ‘11 - correcting about 27% from the Sep ‘10 top, shortly after the 50 day EMA crossed below the 200 day EMA (the ‘death cross’).

While the stock price dropped to its 52 week low, all four technical indicators reached higher bottoms (marked by blue arrows). The strong positive divergences gave a signal that the bull market was ready to resume.

The sharp recovery climbed past the 200 day EMA within a month, pulled back to the long-term moving average in end-Mar ‘11 – giving a good entry opportunity, and tested the Sep ‘10 top on a huge volume spike.

Negative divergences in all four technical indicators, which made lower tops, led to a drop down to the rising 20 day EMA. The stock price is completing a bullish rounding-bottom pattern. A likely test and breach of the Sep ‘10 top of 528 can take the stock to its 52 week intra-day high of 590 in the near term.

Will the bears go into hibernation? Very unlikely in the middle of summer. But the technical indicators are not holding out much hope for them. The MACD is positive, and has crossed above the signal line. The ROC is rising in positive territory above its 10 day MA. The RSI is about to enter the overbought zone. Only the slow stochastic is showing some weakness, as it is below its 50% level. All three EMAs are rising, and the stock is trading above them. The bulls are back in control.

Bottomline? The stock chart pattern of Castrol India endured a six months long bull market correction; in spite of the ‘death cross’ and the two months spent below the 200 day EMA, the bears could not take control. Like Colgate, this stock can be added at any price, and most definitely on dips and corrections.

Stock Chart Pattern - Castrol India

The stock chart pattern of Castrol India is a great example of how solid, well-managed market leaders behave through bull and bear periods. It is also an example of why investors should concentrate on individual stocks for their portfolio and not worry too much about the day-to-day fluctuations in the BSE Sensex index chart pattern.

Castrol India has a near 20% share of the automotive lubricants market in India. 70% owned by Castrol, UK, the company has grown steadily albeit slowly - with strong cash flows, regular dividends and negligible debt. The fundamentals justify this as a good long term portfolio stock.

The high cost of oil and the global down turn has affected the performance of the company, and the company had to reduce product prices earlier this year. But the stock price is not showing any adverse effects. The one year bar chart pattern of Castrol India shows some interesting formations that could lead to longer term trading opportunities:-

The stock made a 52 week low at Rs 234 on July 4, '08 and then entered a 'pennant' (or, wedge-like) formation, which indicates a 'continuation' pattern. Since the stock chart pattern entered the 'pennant' formation from below, the likely breakout is in the upward direction.

The stock did break out on higher volumes on June 17, '09 and hit Rs 399, which beat its previous high of Rs 374 made on Dec 31, '07. Since then it has been consolidating within a triangle pattern.

Three times during the 10 month long continuation pattern, the stock made higher tops while both the RSI and slow stochastic made lower tops. On the first two occasions - in Sept '08 and Jan '09 - the stock followed these negative divergences with corrections that lasted over two months. Both times it took support on the lower edge of the 'pennant'.

Is the pattern likely to repeat this time around as well? It might. Then again, it might not. This is what makes technical analysis so exasperating. If you sell the stock - rest assured it will probably go up!

So what is a small investor supposed to do? Look for other signals. Notice how the 50 day EMA has been supporting the stock for the past two months? It should support any corrective fall at 340 level. If the 50 day EMA fails, then the lower edge of the pennant should support at 320 level.

The other thing to watch will be the small triangle being formed after the recent upward breakout from the pennant. A break upwards may get resisted at the previous high of 400. Clearing which it could go to 450.

Bottomline? The longer term chart pattern of Castrol India made a low of Rs 154 on June 14, '06. It has been in a bull market for 3 years. Wait for the budget. Any adverse news may pull the stock down. Pick up a small quantity then.

PS: I haven't commented on the MACD and OBV indicators. What do you think they are signalling? Bullish? Bearish? Neutral?