Technical updates – IFCI and Reliance Capital

This week, let us take a look at the long term charts of a couple of financial companies. Both were darlings of investors during the 2003-07 bull phase but had since fallen on bad times for different reasons.

IFCI had a lot of NPAs on its books and its CEO got involved in fraud. The next CEO got into a tussle with the government – which is the major share holder. The company tried for a banking licence but lost out to IDFC. It is now in the process of cleaning up its books.

Reliance Capital has some popular funds – like Growth and Vision - under its management. But Anil Ambani got embroiled in the 2G scam (though he managed to evade jail time) and investors pulled out of mutual funds big time during 2010-11.

The change in market sentiment after the Modi-led NDA came to power has affected the fortunes of both companies positively, as the charts below clearly show.

IFCI

IFCI’s stock formed an inverse head and shoulders reversal pattern marking the end of a bear phase during Nov ‘11–Jan ‘12, and then rose sharply on strong volumes to touch a high of 47.50 in Feb ‘12. It then started the next leg of its long down trend from its Jan ‘08 top.

The stock dropped to a high volume ‘panic bottom’ of 27.65 on Aug 27 ‘12, and then dropped even lower to 24.85 on Sep 3 ‘12 before rallying to touch a high of 38.95 on Jan 7 ‘13. This time, it formed a head and shoulders reversal pattern and dropped down to a 3 years low of 18.60 on Sep 3 ‘13.

The stock price has been rallying since then, bringing all three EMAs to close proximity of each other (marked by light blue oval) in May ‘14. The sharp move that followed was backed by strong volumes. The stock price rose to touch a 2 years high of 44.25 on Jun 9 ‘14, but overbought technical indicators led to a correction that is trying to hold on to the support from its 50 day EMA.

The stock has a high valuation and is good only for trading. Long-term investors should stay away.

Reliance Capital

The stock price of Reliance Capital formed a small ‘double bottom’ reversal pattern in Dec ‘11 that ended its bear phase. The subsequent rally rose to touch a high of 501.70 on Jan 4 ‘13, but negative divergences visible on all four technical indicators (marked by blue arrows) stalled the rally.

A sharp correction dropped the stock to a low of 301 on Mar 26 ‘13. The stock price then started a long consolidation within a ‘rectangle’ pattern. A high volume price spike caused an upward break out from the rectangle on May 13 ‘14.

The stock price rose to touch a 3 years high of 664.55 on Jun 9 ‘14. All four technical indicators entered their respective overbought zones. The stock has since been in a corrective mode, seeking support from its 50 day EMA. If the support breaks, the stock can drop to 501, or even lower – to the support level of 460.

I avoid any company that has the ‘Reliance’ name in it. You are on your own here!

Free eBook on Technical Analysis – thanks and clarifications

The free eBook: ‘Technical Analysis – an Introduction’ was launched on the last day of 2011 – after considerable time spent at the planning stage. Some important concepts in technical analysis has been covered in brief, with real-life chart examples.

The idea was to generate curiosity and interest among small investors so that they may get motivated to delve deeper into the subject. There are some excellent and comprehensive books – such as the ones written by Edwards/Magee and Martin Pring – which cover technical analysis in greater detail. (The search box of flipkart.com at the bottom of the page can be used for searching books on investment.)

The response from regular as well as new readers has been quite overwhelming, and everyone deserves special thanks for making my endeavour in producing the eBook worthwhile. Some have already finished reading the eBook and provided suggestions for improvement. Reader involvement is appreciated.

A few of the reader feedbacks received so far made it necessary to post a few clarifications about the purpose of the eBook. The most important one is to demystify the subject of technical analysis.

Technical analysis is not a magic potion that will suddenly turn short-term trading losses into profits overnight. Nor will it identify unknown stocks that will turn a Lakh into a Crore within a short time. But knowing the basics will help investors to take more informed decisions about when to enter and when to exit a stock.

A second point worth mentioning is that the eBook is not going to turn novice investors into expert technical analysts. Becoming an expert requires several years of experience and application – as in any other subject.

A third point is that many technical patterns have specific ‘rules’ associated with them. Remembering the pattern but not the rules can cause serious losses. The human mind seems programmed to see patterns where none may exist. Bigger problems are confusing bottom-reversal and top-reversal patterns, and jumping to conclusions about a pattern before it has fully formed.

Last but not the least, is that it isn’t necessary for similar patterns to behave identically. In a recent post on IFCI Ltd, four ‘rising wedge’ patterns were identified - each behaved a little differently from the other. So, it is not enough to identify a pattern. One has to remain flexible about the outcome of the pattern.

If you haven’t yet received a copy of the free eBook, you can get one by sending an email to:mobugobu@yahoo.com

Stock Chart Pattern - IFCI Ltd (An Update)

The previous update of the stock chart pattern of IFCI Ltd was posted more than a year back. The stock had touched a high of 78 in Nov ‘10, followed by a sharp correction to 50 and appeared to be consolidating within a triangle.

All four technical indicators – MACD, ROC, RSI and slow stochastic - touched lower tops while the stock rose to its high. The combined negative divergences had provided advance warning of a correction. The following comments were made: “If you are still holding, maintain a strict stop-loss of 54. A better idea may be get out and not go anywhere near this stock again.”

The last comment seems almost prophetic when you look at the bar chart pattern of IFCI Ltd:

The negative divergences in all four technical indicators, formed during Oct – Nov ‘10 have been marked by blue arrows. After the sharp drop from the peak of 78 to a low of 50 below all three EMAs in Nov ‘10, the stock consolidated within a bearish ‘rising wedge’ pattern – marked 1 – and rose above all three EMAs.

The break down below the wedge in Jan ‘11 was followed by a pullback towards the wedge, which received combined resistances from the 20 day and 200 day EMAs. Such pullbacks happen often, but not always, as can be observed in the ‘rising wedges’ marked 2 and 4. The stock price dropped to a low of 46 in Feb ‘11 and started forming a slightly prolonged ‘rising wedge’ – marked 2. The ‘death cross’ of the 50 day EMA below the 200 day EMA confirmed a bear market.

‘Rising wedge’ number 2 failed to cross above the 200 day EMA. The stock broke down without a pullback to a low of 44 in May ‘11 before starting a consolidation within another ‘rising wedge’ – marked 3. The break down below ‘rising wedge’ number 3 wasn’t followed immediately by a pullback. It came after 10 days. The subsequent slide went all the way down to 28 in Oct ‘11, before the formation of ‘rising wedge’ number 4.

The sharp break down below ‘rising wedge’ number 4 touched a low of 20 in Dec ‘11. Note that all four technical indicators showed positive divergences by touching higher bottoms – marked by blue arrows – suggesting an upward bounce. Since the stock was deep in a bear market – having lost 75% from its peak of 78 – the bounce wasn’t strong enough to cross above the 50 day EMA, despite solid volume support.

There is every possibility of the stock falling to its Mar ‘09 low of 15. The fundamentals don’t look very encouraging. Hopes of a banking licence has receded. The MD is under scrutiny by the authorities. The government may replace its debt with equity and gain management control. The volatility in the price has turned it into a trader’s favourite.

Bottomline? The stock chart pattern of IFCI Ltd is an example of how mismanagement of operations and finances has enabled the bears to create havoc. Small investors should steer clear of such ‘cheap’ stocks.

Stock Chart Pattern - IFCI Ltd (An Update)

The previous update of the stock chart pattern of IFCI Ltd was back in Feb ‘10. The stock was consolidating within an ascending triangle pattern (flat top at 60 and higher bottoms) and I had expected an upward break with a minimum upside target of 70. But I had warned investors that the counter was speculative and not for the faint of heart.

Consolidations within a triangle pattern occurs quite frequently on stock charts but are notorious for being unreliable in gauging the future direction. The general rule for consolidation patterns is a break out in the original direction. If an index or stock enters a consolidation zone after a bull rally, it is expected to move up after the consolidation is over. A consolidation after a correction is usually followed by another down move.

That doesn’t always happen in triangle patterns. However, ascending and descending (lower tops and flat bottom) triangles tend to be more reliable with the break out occurring above (or below) the flat side. Ascending triangles have measuring implications. The difference between the lowest point within the triangle and the flat top is added to the flat top.

The stock had touched a low of 37 in Jul ‘09, dropping 23 points below 60. Adding 23 to 60 gives an upward target of 83. Why then did I mention a target of 70? Because that was a long-term support-resistance level where selling was likely. The bar chart pattern of IFCI Ltd from May ‘09 onwards shows that the stock crossed 70 but fell short of 83:

The ascending triangle pattern was confirmed by the multiple tops at 60 in Sep ‘09, followed by a higher bottom at 41 in Nov ‘09. The stock continued its consolidation on gradually reducing volumes, which is typical of consolidation patterns, till volumes started picking up from Jul ‘10.

The upward break out from the ascending triangle on Jul 16 ‘10 was not accompanied by significantly strong volumes, and led to a sideways consolidation within a rectangle pattern (between 57 and 64) upto the end of Sep ‘10. A high volume break out from the rectangle on Oct 1 ‘10 saw the stock touch a high of 77 on Oct 13 ‘10 followed by a higher top of 81 on Nov 11 ‘10.

Note that all four technical indicators – MACD, ROC, RSI and slow stochastic - made lower tops while the stock moved higher. The combined negative divergences warned of a correction – which came soon and the stock swiftly dropped to 52, giving up almost all the gains it made from the level of 50 back in Feb ‘10. Now you know why this stock is not for the faint of heart!

What next? The stock is consolidating around the level of 60 and the 200 day EMA within another triangle pattern. As per the general rule of consolidation patterns mentioned above, the stock is likely to break down below the triangle. The technical indicators are also looking bearish. If you are still holding, maintain a strict stop-loss of 54 (previous bottom). A better idea may be get out and not go anywhere near this stock again.

Bottomline? The stock chart pattern of IFCI Ltd seems to have enjoyed its few days of limelight and has reverted back to its no-return days. The periodic news about inducting a white knight and getting a banking licence have sustained investor (or should I say speculative?) interest. Far better stocks are available in the financial sector.

Stock Chart Pattern - IFCI Ltd (An Update)

My previous look at the stock chart pattern of IFCI Ltd was in the last week of May '09. This trader's favourite stock had risen sharply to 50, where I had expected some resistance. After a brief consolidation in a triangle pattern, the stock spurted to 60, where it ran into longer term resistance from the May-Jun '08 highs.

The one year bar chart of IFCI Ltd has since formed a very interesting bullish pattern:-

The stock corrected to 46 on Jun 9 '09. A 4 weeks sideways consolidation between 48 and 56 followed, after which there was a rapid fall to 37. A 'V' shaped recovery and a gradual rise afterwards took the stock back to test its earlier high in Sep '09.

Several attempts to break the resistance at 60 was met with profit booking and the stock corrected down and made a higher low of 41 in Nov '09, where it received good support from the 200 day EMA.

Another upward rally took the stock back to 60 on Jan 8 '10. More profit booking caused a drop towards the long-term moving average. Once again, the stock received good support at the 200 day EMA and made a higher low of 46.

At today's close, the IFCI stock has given precisely zero returns in more than 8 months since my previous post. So why am I discussing about this stock?

It is because of the bullish 'ascending triangle' pattern being formed (with a flat top at 60 and an upward sloping trend line connecting the higher lows). A break out can take the stock to 70, and even higher.

That is not the only reason for being bullish. Notice the higher volumes on up days that has caused the OBV to keep moving higher even as the stock has hardly gained anything. That is a sign of 'accumulation'.

The MACD is marginally negative and below the signal line. The RSI is below the 50% level. The 20 day EMA is below the 50 day EMA. All these indicate short-term bearishness, which could lead to another drop to the 200 day EMA.

Bottomline? The stock chart pattern of IFCI Ltd is showing some weakness. This counter is not for the faint of heart and is strictly for speculation. If you want to take a punt on some sort of a restructuring of its business in the near future, use any falls to enter. Serious investors should stay miles away.

Stock Chart Pattern - IFCI Ltd

The stock chart pattern of IFCI Ltd provides clear evidence of the popularity of this stock with traders. Right through the bear market, it has provided ample opportunities for making trading profits.

Since I have professed my bias towards investing, and not trading, why am I discussing a stock that makes investors shy away but traders rub their hands in glee? It has got something to do with the concept of a 'mad money' portfolio.

90% of my 'core' portfolio is 'boring' - held in 'safe' large-cap defensive stocks and cyclicals which pay regular dividends. The holding cost of this core portfolio is near zero because of partial profit bookings, bonus issues and rights issues.

But even a gray-haired geriatric needs an occasional feeling of excitement. There are better places - like the race course and card tables - for adrenalin junkies. However, the odds in such places favour the house.

So 10% of my portfolio - my 'mad money' portfolio - comprises fundamentally questionable, 'what-if' and junk stocks. Should all the stocks in this portfolio go down the tube, that is a risk that has been built into my return equation.  But even if a single stock hits it big, the returns will recoup all the losses made by the rest of the stocks.

IFCI belongs to this 'mad money' category. Investors who like to take on more risk may increase the percentage of the 'mad money' portfolio suitably - but it should not exceed 25-30%.

Enough digression about investment philosophy. Let us have a look at the one year bar chart pattern of IFCI Ltd:-

(Please right-click on the image; open it in a new tab or window for a better view.)

After making a bottom at Rs 15 in early Dec '08, the IFCI stock rose to 26 in early Jan '09. Doesn't sound like much, does it? But that is a 73% rise in a month's time! The stock drifted down to touch Rs 16 in Mar '09. This bullish 'double bottom' pattern has been marked on the chart above.

The chart pattern shows a slower rise for the rest of Mar '09, but volumes picked up in Apr '09 and IFCI moved up to Rs 29 in early May '09. A brief consolidation was followed by a huge jump in price and volume.

This time the stock hit Rs 50 - rising more than 200% in 6 weeks! Now you know why it is a trader's delight. There are some headwinds - the zone between 50-52 may provide good resistance.

The technical indicators are indicating caution. The stock has moved sharply above its 20 day EMA, which in turn, has moved sharply away from the 50 day EMA. The divergence between the MACD and its signal line is also increasing.

Both the RSI and slow stochastic are in overbought zones. The ROC, which has been oscillating around the zero line for the past few months, has also rapidly moved up to the 100 mark.

A correction seems to be around the corner. It will give the stock time to catch its breath before conquering the resistance at the 50-52 zone and move up towards the next resistance zone between 65-72.

Bottomline? The stock chart pattern of IFCI Ltd shows a possible drop to the support of the 20 day EMA between 35-40. That dip can be used to re-enter the stock. Caveat: this is strictly for those with a trading bent. The fundamentals of the company do not justify a long term investment.

Stock Market News, Financial News - Feb 20, 2009

Nikkei touches Oct trough amid economy worries

TOKYO (Reuters) - Japan's Nikkei stock average was down 1.8 percent on Friday, after briefly touching its October bear market low, dented by bank shares on worries about their European peers, while exporters largely failed to benefit from a weak yen.

Jittery investors also pushed the broader Topix index to 741.42, a level that would mark its lowest close in 25 years.  (More ... )

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Rupee edges lower, strike affects volume

MUMBAI (Reuters) - The rupee dropped on Friday, weighed down by losses in the share market and a stronger dollar overseas, but volume was thin following a one-day strike by central bank employees.

At 10:20 a.m., the partially convertible rupee was at 49.87/88 per dollar, 0.5 percent weaker than Thursday's close of 49.62/63.

"The forex market is open but there is very thin trade, the strike has affected volumes," said a senior dealer with a private bank.

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L&T says studying Satyam decision

MUMBAI (Reuters) - Larsen & Toubro, the largest shareholder in Satyam Computer Services, said it will review a decision to allow the fraud-hit outsourcer to increase shares on issue and sell a stake before making its next move.

"We are studying details of the Company Law Board order. Only after studying the details, we will take a decision," Chairman A. M. Naik told reporters on Friday.

L&T, India's leading engineering and construction firm, has a 12 percent stake in Satyam.  (More ... )

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IFCI for rejig of entire Maytas board, open to bigger role

By Financial Express Bureau

Development Financial Institution IFCI Ltd is favouring reconstitution of the existing board of Maytas Infrastructure as it lost the trust of one and all and cannot perform the duties with due importance and in a more transparent manner. While welcoming the Centre's move to refer the case to CLB, IFCI said that the company was 'overlooked' despite having 17.4% stake in Maytas Infra, said Atul Kumar Rai, chairman and managing director, IFCI.  (More ...)