Stock Chart Pattern - Hero Honda Ltd (An Update)

The previous update of the stock chart pattern of Hero Honda was posted back in Nov ‘09. The stock was a sterling performer during the bear market – moving up from 630 in Jul ‘08 to 1100 in Mar ‘09 – while the Sensex and most other stocks were hitting their 52 week lows.

The strong performance continued for another year - right up to Apr ‘10 – when the stock price crossed the 2000 level and closed at 2057 (marked as T1) in the week ending Apr 9 ‘10. A gain of 225% from its Jul ‘08 low.

Let us look at the two years weekly closing chart pattern of Hero Honda and find out what happened after that excellent up move:

During Jun ‘09, the 1465 level had provided good resistance to the up move. Once the stock broke the resistance in Jul ‘09, it quickly reached a new closing high of 1736 in the week ending Jul 24 ‘09.

The subsequent correction found support from the previous resistance level of 1465 – another instance of a resistance turning into a support. Volumes were quite strong during the resistance and support.

A 7 months long consolidation followed within a bullish ‘ascending triangle’ pattern, from which the expected upward break out occurred in Feb ‘10. Note the volume bars in Feb ‘10 – they should have been substantially higher to technically validate the upward break out. That was the first warning about an impending correction or reversal.

Though the stock price rose sharply to close at 2057 in Apr ‘10, the MACD, ROC and RSI reached lower tops and the slow stochastic just managed to reach its previous top. The combined negative divergences of all four technical indicators was the second warning about a possible correction/reversal.

The stock price corrected down to 1858 in the week ending May 21 ‘10, only to rise to 2050 (marked as T2) in the week ending Jun 25 ‘10 – falling short of the Apr ‘10 top of 2057. The lower volumes during the Jun ‘10 top opened the door for a bearish ‘double-top’ reversal pattern. That was the third warning about a correction/reversal.

The stock price crashed through the 20 week EMA in Jul ‘10 and dropped below 1858 (the May ‘10 low), which confirmed the ‘double-top’ reversal pattern. The stock price consolidated sideways till Dec ‘10. There was a sharp drop below the 50 week EMA (equivalent to the 200 day EMA on daily charts) to 1679 on strong volumes, followed by an equally sharp 300 points spike to 1986 on higher volumes.

That seemed to exhaust the bullish fervour. The rumours about Japan’s Honda Motors pulling out of the joint venture with the Munjals of Hero group were confirmed. The stock price fell more than 500 points to the support level of 1465 in Feb ‘11. The 20 week EMA crossed below the 50 week EMA – the dreaded ‘death cross’ that confirmed a bear market.

But you just can’t keep a good stock down for long. A bullish double-bottom pattern (marked as B1 and B2) formed in Mar ‘11, and the stock recovered quickly above both the EMAs in Apr ‘11. It has been trying to move up for the past two months, but without much success. The low volumes haven’t helped. But the 50 week EMA has provided good support, and the 20 week EMA has crossed above the 50 week EMA.

The technical indicators are weakening. The MACD is above the signal line, but the upward momentum is slowing. The ROC is still positive, but has dropped below its 10 week MA and touched a lower top. The RSI has dropped below its overbought zone. The slow stochastic is threatening to do likewise. Another test of support from the 50 week EMA is likely.

The company is fundamentally very strong, with strong operating cash flows, negligible debt, huge reserves, a regular dividend payer and the leader in the two-wheeler segment. The uncertainty about future technology inputs and entry of Honda in the two-wheelers segment are the negative overhangs.

Bottomline? The stock chart pattern of Hero Honda shows that technically the worst may be over. Some fundamental concerns remain. The main competitor, Bajaj Auto, is di’worse’ifying into four wheelers. That could be just the opportunity for Hero Honda to consolidate its leadership position. Investors can use dips to accumulate.

Which stocks are keeping the Sensex down?

The BSE Sensex index comprises 30 stocks. 16 of them are currently trading above their 200 day EMAs – indicating bull markets. 14 are trading below their 200 day EMAs, preventing the Sensex from reaching new highs.

Here are brief thumb sketches of the laggards:

BHEL: Bounced up sharply from a low of 1905, but found resistance from the 200 day EMA; currently trading just below the long-term moving average.

CIPLA: Touched a low of 286 before a sharp rally to 332 – above its 200 day EMA; now consolidating between the 50 and 200 day EMAs.

DLF: The rally from the low of 209 stopped well short of the falling 200 day EMA; the stock has dropped down to seek support from its 50 day EMA.

Hero Honda: The stock touched a low of 1378; a spirited rally was stalled at its falling 200 day EMA; the stock has started to drop towards its 50 day EMA.

HUL: The stock dropped below its 200 day EMA on Jan 27 ‘11; it has been trading sideways since then, alternately going above and below the long-term moving average.

Jaiprakash Assoc.: From a low of 70, the stock reached a high just short of the 100 mark but well below its falling 200 day EMA; it has dropped down to seek support from its 50 day EMA.

L&T: The stock is trading sideways in a narrow range, just above its 50 day EMA but well below its falling 200 day EMA.

Maruti: Trading below the 200 day EMA for the past three months, the stock had a day’s close above the long-term moving average, only to drop below its 50 day EMA.

NTPC: The stock has been trading below the 200 day EMA since end-Oct ‘10; a couple of brief forays above the long-term average saw strong selling pressure; currently trading below its 50 day EMA.

ONGC: The bonus and stock split didn’t help the stock much; a day’s close above the 200 day EMA was followed by a steep drop below its 50 day EMA.

Rel. Comm.: A rally on strong volumes could only sustain above its 50 day EMA briefly, and has fizzled out already; the stock is well below its 200 day EMA.

Reliance: The stock has been trading in a broad sideways range, oscillating around its 200 day EMA – giving no returns to its investors; currently trading just below the long-term moving average.

Rel. Infra.: Another ADAG stock with equally disastrous results – a brief rally on good volumes above the 50 day EMA that is showing signs of weakness; the stock is trading way below its 200 day EMA.

Sterlite: A sharp rally accompanied by a volume spike took the stock from a low of 45 to a high of 68; but it stopped short of its falling 200 day EMA and started correcting.

Unless some of these 14 stocks start to rally soon, the Sensex may remain range-bound. Technically, the most likely candidates to help propel the Sensex upwards are BHEL, CIPLA, HUL, L&T, Maruti and Reliance. Dropping Rel. Comm. and Rel. Infra. from the index would not hurt either.

12 Sensex stocks displaying the ‘death cross’

The main reason why the Sensex isn’t showing a ‘death cross’ yet, is that only 12 of the 30 Sensex stocks are showing the ‘death cross’. The balance 18 are technically still in a bull market. For the uninitiated, the ‘death cross’ is the 50 day EMA crossing below the 200 day EMA on a price chart, signalling the beginning of a bear market. (The 50 day EMA crossing above the 200 day EMA, signalling the beginning of a bull market, is called a ‘golden cross’.)

Chart patterns of the 12 Sensex stocks displaying the ‘death cross’ (marked by blue ovals) are discussed below:

BHEL

BHEL is a PSU blue-chip that started correcting after hitting a peak in Oct ‘10. The correction in the Sensex from Nov ‘10 exacerbated the fall. The ‘death cross’ occurred in end-Nov ‘10, two days after the stock dropped sharply to an intra-day low of 2060. A strong pullback took the stock up to 2379, where it faced strong resistance from the combined 100 day and 200 day EMAs.

Though technically in a bear market, the stock is trying to build a base. A move above 2379 will create a bullish pattern of higher tops and higher bottoms. The RSI and slow stochastic are showing positive divergences, having reached higher tops as the stock made a lower top. Use the dip to accumulate.

DLF

DLF, the real-estate high flier, doesn’t really score very high on management ethics, accounting transparency or investor friendliness. The stock is in a long-term bear market. A brief rally took the stock to a 52 week high of 397 in early-Oct ‘10. That was an opportunity to sell. The ‘death cross’ in Dec ‘10 has restored the bear market. With the recent tightening of loans to real-estate players by banks and housing finance companies, you can forget about investing in this stock even as a contrarian play. It may be headed down to two-digits.

Hero Honda

Hero Honda was one of the stars of the bull market till its peak of 2094 in Apr ‘10. A technically overbought condition started a corrective spell. The confirmed news of Honda, Japan pulling out of the joint venture was given a thumbs down by the market. The uncertainty about the future has led to heavy selling. The ‘death cross’ in end-Jan ‘11 is signalling a bear market for this blue-chip. Avoid.

Jaiprakash Associates

Jaiprakash Associates has been in a down trend since touching a high of 180 in Oct ‘09. The ‘death cross’ occurred in May ‘10, confirming the bear market. The rally from Sep-Nov ‘10 was an exit opportunity. Launching huge projects and borrowing money by the truck-load seems to be the core competency of this company. The stock is headed towards low double-digits. Avoid.

Larsen & Toubro

It is a bit disappointing to see a blue-chip like Larsen & Toubro in this group of bearish Sensex stocks. It started correcting with the Sensex after touching a peak of 2212 on Nov 4 ‘10. The sharp fall in Jan ‘11 was partly due to the less-than-expected Q3 performance. The re-structuring into 9 separate companies has also caused some uncertainty in the minds of investors. The ‘death cross’ will occur tomorrow, but I would use this dip to accumulate the shares of this fundamentally strong and investor-friendly company.

Maruti Suzuki

Maruti Suzuki’s chart pattern has two ‘death crosses’ – one in May ‘10 and the other in Jan ‘11. What does it indicate? Technical analysis is not a science, and no rule is sacrosanct. The ‘death cross’ usually indicates the start of a bear market. But not in this case. The stock has been consolidating sideways since reaching a top of 1740 in Sep ‘09 – causing the ‘death cross’ to occur twice without entering a bear market. Yesterday’s low of 1170 formed a possible double-bottom. The RSI and slow stochastic are indicating a likely upward bounce. Accumulate.

NTPC

The NTPC stock chart pattern is also showing two ‘death crosses’ – the first in May ‘10 and the second in Nov ‘10. The stock has been drifting downwards since touching a peak of 242 on Dec 31 ‘09, and is in a bear market. The hype about the phenomenal growth and profit opportunities in the power sector has proved to be just that – hype. Avoid.

ONGC

The ONGC chart also has two ‘death crosses’ – one in Apr ‘10 and the other in Jan ‘11. The first one didn’t cause too much damage to the bulls. The current one is unlikely to do much damage also – because the FPO has been scheduled for Mar ‘11, and the DIIs are likely to buy at dips till the FPO goes through. This is a great company but the government’s meddling has messed up its operations. This is a major reason why I avoid all PSU stocks. Accumulate.

Reliance Comm

Where is the ‘death cross’ in the Reliance Communications chart? It happened more than two years back, and is not showing up in the one year chart pattern! The stock is in a long-term bear market and should ideally be removed from the Sensex 30 index. Only big-brother can bail this company out. Don’t go anywhere near this.

Reliance Infra

Reliance Infra chart also has two ‘death crosses’. The first one was caused by the sideways movement in Feb ‘10. The next one in Sep ‘10 signalled the bear market. Anil Ambani has proven to be a big bag of wind with a slow leak. If you are invested in this company, bail out now before it becomes too late.

Reliance Ind.

Reliance chart has two ‘death crosses’ as well – one in Aug ‘10 and the other in Jan ‘11. The first one was due to the sideways consolidation that has generated negative returns in the past one year. But the second one looks more ominous. The fall in Jan ‘11 has been steep and on increasing volumes. If Reliance doesn’t recover soon, it will drag down the Sensex with it. The technical indicators are hinting at a further fall. Wait for the correction to play out before entering. 

Tata Power

The ‘death cross’ in the Tata Power chart hasn’t yet happened – even though it has been marked in Sep ‘10. The 50 day EMA spent only a few trading sessions below the 200 day EMA due to the sideways consolidation, followed by a 52 week high. The current corrective spell may push the stock into a bear market. Wait for the correction to play out before entering.