During my previous technical update of the stock chart pattern of Akzo Nobel (ICI) India more than a year back, the stock had corrected down to 845 after touching an all-time high of 970 in Sep ‘10. The technical indicators were looking oversold while the OBV indicated accumulation. That led me to surmise that the next up move could touch the 4-digit mark. I had also suggested that any drop below 845 could be used to enter with a stop-loss at 750.
It is time to have a look at the two years bar chart pattern of Akzo Nobel and see what kind of returns the stock has provided:
The stock did eventually rise to a new all-time high of 1045 in Jul ‘11, but not before inflicting pain on investors. Such are the hazards of relying on technical analysis – chart patterns don’t always play out as per expectations.
Note that the 750 level provided good support during Nov ‘10. It was briefly penetrated in Dec ‘10, before the stock price bounced up nicely. Through most of Jan ‘11, the stock managed to stay above the 750 level. But once the support was broken, the stock fell quickly to a low of 680 – a 30% correction from the top of 970 that briefly pushed the stock into a bear phase. The 680 level coincided with the top of Jan ‘10 – an example of how a previous top can often act as a support.
The bear domination didn’t last long. Within 5 weeks of touching the low of 680 in Feb ‘11, the stock broke out above the 750 level on a sharp volume spike, and proceeded to rally to an all-time high over the next 4 months.
Couple of interesting points to note here. When the stock price dropped to its 52 week low of 680 in Feb ‘11, all four technical indicators touched higher bottoms (marked by short blue arrows). The combined positive divergences gave advance notice that the bear phase won’t last long. Again, during the four months long rally to the all-time high of 1045 in Jul ‘11, all four technical indicators reached lower tops (marked by long blue arrows). The combined negative divergences warned that the bull rally was over.
Technical analysts often claim that the fundamentals are ‘in the price’. In this case, they would have been correct. Q2 ‘12 results announced last month showed good top line growth but a sharp drop in profits at the gross and net levels, thanks to the rise in raw material costs. The stock price dropped vertically below the 200 day EMA post the results announcement to the support of the blue up-trend line, but the stock had already corrected more than 10% from its peak prior to the results.
The 200 day EMA is providing resistance to the efforts of the bulls to take the stock price back into a bull market. The falling 50 day EMA is still above the long-term moving average, but a cross below the 200 day EMA (‘death cross’) may push the stock price down to the support zone between 680 – 750.
The technical indicators are giving mixed signals. The MACD is above the signal line, but inside negative territory. The ROC is falling sharply towards its negative zone. Both the RSI and the slow stochastic are above their 50% levels. Bounce ups on good volumes from the up-trend line, the 750 level or the 680 level may be good entry points.
Bottomline? The stock chart pattern of Akzo India (ICI) Ltd is an example of why small investors should look at fundamentally strong companies with solid balance sheets and trustworthy managements. While the Akzo stock has provided zero returns (not counting dividend of Rs 18 per share) in the past 12 months, it has given nearly 50% returns over the past two years. Compare that with the Sensex, which has provided negative returns in the past 12 months and zero returns in the past two years.
