Technical updates – Exide and Hero Moto

The automobile industry has been going through a period of transition and upheaval due to the overall economic slowdown. Lower oil prices have helped the industry. But withdrawal of excise duty concessions haven’t.

Commercial vehicle sales have just started to improve after a prolonged slump. Passenger vehicle sales are struggling. Even 2-wheelers (Royal Enfield aside) are troubled by poor rural sales.

It is no surprise that the 2 years closing charts of Exide and Hero Moto are reflecting the challenges being faced by the auto industry.

Exide

Exide’s stock touched a 2 years closing low of 100 in Jan 2014, before embarking on a strong bull phase that took the stock to a 2 years closing high of 198.70 in Jan 2015 – almost doubling in a year.

The stock has been in a correction since then, dropping to a closing low of 141.90 on Jun 12 ‘15 – retracing almost 58% of its bull rally and falling into bear territory.

The stock price has bounced up from the 142 level, but is trading below all its three EMAs. The ‘death cross’ (marked by light blue oval) of the 50 day EMA below the 200 day EMA has technically confirmed a bear market, but the bear phase may not last long.

Technical indicators are turning bearish, which can lead to a test of support from the 142 level. Exide is a market leader. The dip can be used to add, with a stop-loss at 138.

Hero Moto

The stock price of Hero Moto formed a bearish ‘inverted saucer’ pattern from July 2013 to Feb 2014 and closed briefly below all three EMAs in bear territory.

Bulls used the dip to rally strongly. The stock price soared to a 2 years closing high of 3258 on Dec 1 ‘14 – gaining almost 70% from its Feb ‘14 low.

The subsequent correction dropped the stock price below all three EMAs into bear territory. The stock formed a ‘double bottom’ reversal pattern at 2300 and has closed above its three EMAs in bull territory.

All four technical indicators are in bullish zones, but showing negative divergences by touching lower tops (marked by blue arrows). The stock price may correct a bit before resuming its up move.

Stock Chart Pattern - Hero MotoCorp (An Update)

In the previous technical update back in Jul ‘11 (marked by grey vertical line on chart below), the chart pattern of Hero MotoCorp (formerly Hero Honda) was in the midst of a recovery from an intra-day fall below the 1400 level in Feb ‘11.

Termination of the long association with Honda of Japan had been the major reason for the fall in the stock’s price. Uncertainty about future technological inputs was compounded by Honda’s independent entry into the Indian two-wheeler market.

Shortly after the previous post, the stock price dropped to the long-term support/resistance level of 1700, only to bounce up smartly and rise to a new high of 2232 in Sep ‘11. Doubts about the future of this blue-chip company seemed to exhaust the enthusiasm of the bulls.

For the past 16 months, the daily bar chart pattern of Hero MotoCorp has been stuck in a rectangular band between 1700 and 2250 – testing the patience and resolve of long-term investors.

The interesting thing to note technically is the behaviour of the 50 day EMA, as the stock price oscillated between the two extremes of the rectangular band. During Jan-Feb ‘12 and again during Jun ‘12, the 50 day EMA merged briefly with the 200 day EMA, but bounced up on both occasions.

However, on Aug 30 ‘12, the 50 day EMA dropped below the 200 day EMA – the ‘death cross’ that confirms a bear market. After a single day’s breach of the upper edge of the rectangular band on May 2 ‘12, the stock price has formed a bearish pattern of lower tops and lower bottoms – by touching a lower top in Jun ‘12 and a lower bottom earlier this month.

Technical indicators are bearish, but correcting from oversold conditions. MACD is negative, but has just crossed above its signal line. ROC has moved up sharply above its 10 day MA into positive territory. RSI is trying to emerge from its oversold zone. Slow stochastic has come out of its oversold zone, but remains well below its 50% level.

What should small investors do? Existing holders can continue to hold. The more adventurous may trade the range between 1700 and 2250. New investors can enter with a strict stop-loss at 1700.

There are fundamental reasons behind the suggestion. The company has recently tied up with an Italian design firm – its third technology tie-up after the ones with EBR, USA and AVL, Austria. Looks like the Munjals are working hard at competing with Bajaj Auto and Honda by getting access to latest technological inputs. Two wheeler capacities are being enhanced – both for scooters, which are selling well and for motorcycles, which are under some demand pressure.

Bottomline? The stock chart pattern of Hero MotoCorp has been consolidating within a rectangular band for the past 16 months. Long consolidations are often followed by strong break outs. Break outs from rectangles can happen in either direction. A drop below 1700 may lead to a test of the previous bottom of 1380. A break out above 2250, if accompanied by a volume surge, can take the stock to 2700.