Stock Chart Pattern - Reliance Capital Ltd. (An Update)

The previous technical analysis update of the stock chart pattern of Reliance Capital was posted back in Nov ‘09 (marked by a grey vertical line on the chart below). The stock price had corrected after touching an intra-day peak of 1066 in Jun ‘09 and had twice received support from the upper edge of the gap formed in May ‘09.

As long as the gap was not closed, there was hope of further upside. Accordingly, I had made the following recommendation to readers: “Existing holders can stay invested with a stop-loss at 680. New entrants should await a convincing cross above the 1050 mark.” A look at the chart below will show that my advice was timely and appropriate.

Regular readers know that I have a bias against any company with the word ‘Reliance’ in its name. If you don’t know (or remember) why, you can read this post. What is the reason then for posting this update? Well, there are two reasons. The first is to admit to a classic investing mistake. The original post on Reliance Capital in Apr ‘09 was premised on the prospect of likely monetisation of the company’s ‘hidden assets’ – its huge asset management business (Reliance Capital had the highest AUM back then) and its thriving insurance and financial services businesses. The mistake? Hidden assets may stay hidden and never get monetised. (This is particularly true for ‘holding companies’ that hold huge number of shares in different companies.)

The second and more important reason is to warn new investors that though the stock price had more than doubled – from the intra-day low of 225 (Jan 2 ‘12) to an intra-day high of 482 (Feb 22 ‘12) – during the recent rally, the stock is technically still in a bear market and in a down trend. There is no reason to enter now.

Let us have a look at the three years daily bar chart pattern of Reliance Capital:

The gap in the chart formed in May ‘09 – approximately between 620 and 680 – was filled a year later. That opened up further downsides and triggered the stop-loss of 680 mentioned in the previous update. The stock price bounced up from the lower edge of the gap, and over the next 5 months, gained 40%. But it formed a lower top that marked the beginning of a sharp down trend, which coincided with the bear phase in the broader market.

Note the sideways consolidation between 620 and 680 during Dec ‘10, before a convincing break down below 620 in Jan ‘11. A ‘panic bottom’ formed at 478 in Feb ‘11, following which the stock price bounced up quickly – only to face strong resistance from the earlier support level of 620 in Apr ‘11 and Jul ‘11. This is another example of how a breached resistance level becomes a support level, and a broken support level becomes a resistance level. Another point to note is that support-resistance levels provide better and safer entry-exit points than Fibonacci levels or EMA levels.

The stock price is oscillating near its 200 day EMA. The 50 day EMA is still below the 200 day EMA. The technical indicators are mildly bullish. The MACD is positive and just below its falling signal line. The ROC is also positive and above its 10 day MA, but has turned down. The RSI is a little below its 50% level. The slow stochastic has climbed above its 50% level. The stock price is trying to move up to test the blue down trend line once more, but the falling volumes mean another likely failure of an upward break out attempt.

Bottomline?  The stock chart pattern of Reliance Capital is a clear example of disenchantment within the investing community. The recent sharp rally may have provided huge short-term gains to a fortunate few. If you are one of them, book your profits. New investors can look at a company like Sundaram Finance. If you don’t trust the Ambanis, avoid all companies with ‘Reliance’ in its name.

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Why rely on Reliance?

The truth(?) behind the 6.8% Jan ‘12 IIP growth number

The Index of Industrial Production (IIP) published by the government each month is supposed to give an idea about what is going on in the economy. The Jan ‘12 figure of 6.8% came as a positive surprise, because the IIP number for Dec ‘11 was only 2.5%, and the consensus estimate for Jan ‘12 was about 2.1%. Naturally, the much higher figure seemed to indicate that growth was returning to the Indian economy.

The stock market should have celebrated the news – but didn’t. Were market participants ‘selling on news’, or did they ignore the news as unbelievable? Digging a little deeper into the published data raises more questions than answers.

Manufacturing growth was at a respectable 8.5%. But that growth was largely due to a whopping 92.6% growth in food products and beverages; 56.1% growth in printing, publishing and reproduction of recorded media; and 29.9% growth in medical, precision and optical instruments, watches and clocks. Minus these three items, manufacturing growth would be negative.

In plain English, the above data means that Indian citizens consumed almost twice the amount of food and drinks than what they did in Jan ‘11. Surely, population increase and rural prosperity through the NREGA scheme had roles to play. But 92.6% growth is hard to believe. So is the data that indicates a sudden rise in reading books, newspapers and listening to music and watching movies at home.

A growth in medical instruments may be explained away by the proliferation of modern hospitals and clinics. But why the propensity for buying watches and clocks? Of course, the published data has the following disclaimer: “Indices for January ‘12 are Quick Estimates.” May be the data collection was outsourced and improperly supervised.

More intriguing are the areas of de-growth. Electrical machinery and apparatus fell by –30.5%. Office, accounting and computing machinery fell by –14.1%. Radio, TV and communication equipment and apparatus fell by –13.8%. India is definitely not shining if electrical machinery, computers and communication equipment are showing de-growth.

As happens almost every month, these ‘Quick Estimates’ get revised subsequently. Which means these initial numbers don’t count for much and don’t indicate any trend. The collective wisdom of market participants in ignoring the Jan ‘12 IIP growth number proved correct in this instance.

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 9 ‘12

Both index charts – BSE Sensex and NSE Nifty – show classic break outs above down trend lines followed by pullbacks and upward bounces from the down trend lines. That should mean that trend reversals have occurred and it is time to buy. But all is not well as yet.

Results of the elections in five states have come and gone. The market was not expecting the thrashing that the Congress Party got at the hustings. There are rumblings from UPA partners about big-brotherly treatment. Another surprise was the 75 bps cut in the CRR announced by the RBI prior to its Mar 15 review meeting – probably to preempt the likely liquidity shortfall in the system due to advance tax payments. The better-than-expected manufacturing IIP number has further confused market players.

RBI’s Mar 15 meeting appears to have become a non-event. The good IIP number may dash any possibility of a cut in interest rates. Some experts are already suggesting that the CRR cut will be inflationary. Very little is expected from the Mar 16 budget announcement from a government that has backed itself into a corner financially and politically, with its populist measures and inability to take tough decisions.

BSE Sensex index chart

In the weekly bar chart of the Sensex, last week’s bar shows a dip below the down trend line followed by a strong upward bounce. The ‘golden cross’ of the 20 week EMA above the 50 week EMA has not taken place yet. The technical confirmation of a bull market is still awaited.

The weekly technical indicators remain bullish, but there are signs of weakness. The MACD is positive and above its signal line, but it has stopped rising and the histogram has started falling. The ROC is positive and above its rising 10 week MA. The RSI has started falling towards its 50% level. The slow stochastic has slipped down from its overbought zone.

The pre-budget rally may turn out to be a sideways consolidation. A budget without any negative surprises may provide the trigger for the rally to resume in earnest.

NSE Nifty 50 index chart

The daily bar chart pattern of the Nifty shows the break out above the down trend line, followed by a pullback and then a bounce up with a gap. Note that the volume bar is smaller on last Friday’s bounce up. That is not a positive sign for bulls.

The technical indicators are bearish, but showing signs of a turnaround. The MACD is falling below its signal line, but hasn’t yet entered negative territory. The ROC is negative, but is trying to cross above its 10 day MA. The RSI has bounced up from the edge of its oversold zone, but remains below the 50% level. The slow stochastic is trying to emerge from its oversold zone.

The 50 day EMA has crossed above the 200 day EMA, signalling a return to a bull market. But see what happened back in Apr ‘11 (left part of chart above). The 50 day EMA crossed above the 200 day EMA – only to drop back below it. Any fall below the down trend line can snuff out the bull rally.

Bottomline? Chart patterns of the BSE Sensex and NSE Nifty 50 indices have bounced up nicely after pullbacks to their down trend lines. Such bounces from resistance levels offer entry opportunities – provided there is adequate volume support and bullish technical indications. These seem to be lacking – probably because of the budget announcement hanging like the proverbial sword of Damocles. Those who are already invested should hold with stop-loss at the levels of the down trend lines. New entrants should await the budget announcement.