Stock Chart Pattern - Tata Motors (An Update)

The previous analysis of the stock chart pattern of Tata Motors was posted a year back. The stock price had touched an all-time high of 1350 (270 in the chart below after adjusting for a 5:1 split) on Nov 10 ‘10, and after a brief correction down to its rising 50 day EMA, had bounced up sharply. But there were strong technical headwinds – in the form of negative divergences on all four technical indicators, and likely topping out of the Sensex and Nifty. That led to the following concluding remarks:

“Existing holders should stay invested, or book partial profits at any sign of hesitation near 1350. This is not a time for fresh entry.”

The bar chart pattern of Tata Motors is an example of how a bull market in a fundamentally strong, large-cap stock, which is part of the Sensex and Nifty indices, can get affected by a change of trend in the indices:

(Please note that the price levels in the above chart have been adjusted for the 5:1 stock split – marked by the light blue bell in Sep ‘11. So, all price levels mentioned in the year-ago post should be divided by 5 for comparison.)

Shortly after my previous post, the stock rose to a new all-time high of 276.30 (equivalent to 1381 before the split) on Dec 6 ‘10, supported by high volumes - marked by the upper blue arrow. The price dropped quickly to the rising 50 day EMA, only to bounce up to a slightly lower high of 274.40 (equivalent to 1372 before the split) on Dec 22 ‘10. Note the much lower trading volume marked by the lower blue arrow. This satisfied the first criterion of a bearish double-top pattern.

The confirmation of the double-top came when the stock price dropped below the ‘valley’ low of 242.60 (equivalent to 1213 before the split) between the two tops on Jan 7 ‘11. That gave a minimum downward target of 210.80. (Why? The price difference between the second top of 274.40 and the ‘valley’ low of 242.60 is 31.80; the downward target is 242.60 – 31.80 = 210.80.)

The stock fell to the support level of 215 and the 200 day EMA in Feb ‘11, bounced up and then dropped to a low of 208.60 on Feb 24 ‘11 – meeting the minimum downward target. The bulls took the opportunity to start a new rally that reached a top of 260.40 in Apr ‘11. Note that there wasn’t much volume support for the rally, indicating it would not sustain for long. Simultaneously, the technical indicators – particularly the slow stochastic and the RSI – signalled overbought conditions.

This time, the bears were in no mood to relent. The stock price dropped below all three EMAs to the support level of 215 in end-May ‘11. On Jun 2 ‘11, the price fell below the support level of 215, indicating the beginning of a bear market. The ‘death cross’ of the 50 day EMA below the 200 day EMA (marked by light blue circle) three weeks later confirmed a bear market.

A pullback to the support-turned-resistance level of 215 in Jul ‘11 provided the bears with another opportunity to sell. A waterfall-like drop to a low of 139 on Aug 26 ‘11 was followed by a ‘dead-cat bounce’ and then a new low of 137.60 on Sep 13 ‘11 (a day after the 5:1 stock split). A spirited rally saw the stock climbing above all three EMAs to a high of 207.90 on Oct 28 ‘10.

The failure to test the resistance level of 215 was a sign of weakness, and the Tata Motors stock price has drifted below all three EMAs once more. The technical indicators are looking bearish, which means the correction is not over yet. The MACD has crossed below the signal line and is about to enter the negative zone. The ROC has dropped below its 10 day MA and is trying to cling to the ‘0’ line. The RSI is on the verge of slipping below the 50% level. The slow stochastic has fallen sharply below its 50% level.

Gross global sales in Nov ‘11 were higher than that in Nov ‘10. Whether profits have increased proportionately or not will be known only when Q3 results are announced. At its recent low of 137.60, the stock has fallen a huge 50% from its Dec ‘10 peak of 276.30 – underperforming the Sensex by two times.

Is this a good time to start accumulating the stock? Technically, no. There is a good possibility that the Sep ‘11 low may be tested and broken. Even if it doesn’t break the previous low, such a large-cap index stock is likely to consolidate for a while and enter some sort of a bottoming pattern. That would be a better time to start accumulation.

Bottomline? The stock chart pattern of Tata Motors is in a bear market and is expected to test its recent low. Fundamentally strong but beaten down large-cap stocks should find a place in small investor portfolios. If you don’t have the chart reading ability to time your entry, start buying small quantities on dips below 160. But such stocks are meant for long-term wealth building. Don’t expect miracles in the short-term.

Gold and Silver Chart Patterns: an update

A few months of correction, and all the chatter about a return to the gold standard and the dollar no longer being a reserve currency is off the table! The signs of revival seen on the chart patterns of gold and silver two weeks back proved to be illusory.

Both precious metals are now trading below their 14 day, 30 day and 60 day SMAs, and may drop down to test their Sep ‘11 lows. Will that provide a buying opportunity?

Gold Chart Pattern

The answer should be ‘Yes’ for gold, because it is trading well above a rising 200 day SMA and is in a bull market. Note that the 1750 level provided good support till gold’s price chart formed a small ‘double-top’ reversal pattern and suddenly dived on Thu. Nov 17 ‘11.

A test of the 1600 support level is on the cards. The support should hold since the 200 day EMA is also near 1600. Just in case 1600 gets broken – nothing is certain in technical analysis – 1530 should be a stronger support due to the multiple tops formed near that level during Apr – Jun ‘11.

The downside to a bounce up from 1600 is that a bearish ‘descending triangle’ will get formed, from which gold’s price may fall all the way to 1300. This is a hypothetical possibility as of now, so no need to be alarmed. Let the chart pattern unfold. But it may be prudent not to be gung-ho bullish about buying the likely bounce up from 1600.

Silver Chart Pattern

The answer to the question is ‘Not yet’ for silver, because the white metal and all three of its moving averages (only the 14 day SMA is shown on the chart) are trading below the 200 day SMA – which indicates a bear market. The Sep ‘11 low of 28 may be tested and broken.

Note that silver’s price was consolidating within a small symmetrical triangle formed near the support level of 34, before breaking down sharply on Thu. Nov 17 ‘11. Drawing lines through tops formed in Apr ‘11 and Aug ‘11, and bottoms formed in May ‘11 and Sep ‘11 will form a broad downward-sloping channel pattern with its lower end currently at 26. That is a level which provided support in Nov ‘10 and Jan ‘11 – so an upward bounce can be expected from 26.

Bravehearts may try to bottom-fish at 26. Conservative investors should buy only on a convincing break out above the downward-sloping channel.

Gold and Silver Chart Patterns: rallies reviving?

The sharp corrections seen on gold and silver chart patterns appear to be over, and the bull rallies are all set to resume. Gold’s price never dropped below the 200 day SMA, so technically it was just a bull market correction following a double-top reversal pattern. Silver’s price dropped below the 200 day SMA and has stayed below the long-term moving average for more than a month, raising the spectre of a bear market. However, there are signs of revival of late.

Gold Chart Pattern

Gold’s price is trading above its 14 day, 30 day, 60 day and 200 day SMAs, and all four moving averages are rising – which is the sign of a bull market. More importantly, the price has climbed above the 1750 level – the ‘valley’ level between the two tops at 1900.

Note that the 1750 level acted as a resistance during the recent up move, and once the resistance was overcome, the resistance level has turned into a support level. Gold’s price should start moving up towards its previous top of 1900, and eventually test and overcome the 1900 level to touch a new high.

A satisfactory resolution of the Eurozone debt problems may cause a renewed interest in risky assets and slow down the up move in gold’s price. But the bull market in gold is very much alive, and price dips can be used to add.

Silver Chart Pattern

Silver’s price is on a gradual recovery path, though it is still trading below the 200 day SMA. The fact that the white metal is trading above its 14 day and 30 day SMAs, and the 200 day SMA has started rising again point to a revival of interest in buying silver.

Intrepid investors can start accumulating slowly at current prices. The more prudent action will be to wait for a convincing cross above the 200 day SMA before buying. As with all purchases, a strict stop-loss should be maintained – say, at 32.

Gold and Silver Chart Patterns: an update

Gold Chart Pattern

Gold’s price had formed a double-top reversal pattern after touching 1900. The double-top was confirmed when the price dropped below the ‘valley’ level 1750 between the two tops. Downward target of 1600 was achieved quickly on gold’s chart, after which gold’s price has been consolidating within an upward-sloping ‘wedge’ pattern.

Most consolidation patterns tend to be continuation patterns. That means, the trend before entering the pattern – down, in this case – would continue once price break out happens. Unlike triangle and rectangle patterns, from which break outs can happen in either direction, the rising wedge is fairly dependable. It forms during bear phases, and the price break out is downwards.

Bulls may feel enthused that gold’s price is trading above the 14 day SMA, and the 200 day SMA is still rising – indicating that the bull market is far from over. But the possibility of a break below the rising wedge pattern, and a test of support from the 200 day SMA should induce caution.

Existing holders can keep a stop-loss at 1540 (the level of the 200 day SMA) and continue to hold. New entrants can wait for a likely upward bounce from the 200 day to accumulate. (Note: At the time of writing this post, gold’s price has dropped sharply to 1630, indicating a break below the rising wedge.)

Silver Chart Pattern

After dropping like a brick below the 200 day SMA, silver’s price has been consolidating within a symmetrical triangle. Though silver’s price is trading above the 14 day SMA – a short-term positive – the longer-term outlook is not bullish.

The 30 day SMA (not shown in chart above) has slipped below the 200 day SMA, and the 60 day SMA is likely to follow suit. The 200 day SMA is flattening and may turn downwards soon. Silver’s price is in a clear down trend, marked by lower tops and lower bottoms. Downside targets are 24 and 20. Wait for the correction to play out.

Gold and Silver Chart Patterns: end of long bull rallies?

Gold Chart Pattern

In an update to gold’s chart pattern two weeks ago, the following conclusion was drawn:

‘The present correction/consolidation – whatever it may turn out to be – should restore the technical health of gold’s chart for the next up move.’

The expected drop to 1600 from the double-top at 1900 happened quickly, and gold’s price has been consolidating in a narrow range of $50 since then. It is beginning to look like the next up move may take a while, and gold’s price may dip further – possibly to the 200 day SMA (at about 1520) - before a sustained rise can begin again.

Note that the 200 day SMA is still rising, with gold’s price trading above the long-term moving average. Technically, gold is still in a bull market. But extreme caution is advised about entering at this stage – since the yellow metal is trading below its 14 day, 30 day and 60 day SMAs. All three are likely to act as resistances on any up moves. Not to forget the valley level of 1750 (between the two tops at 1900), which should provide strong resistance to a price rally.

A fall below the 200 day SMA will also mean a 20% drop from its peak, and a likely trend reversal from bull to bear. If you are still holding and in profit, maintain a strict stop-loss at 1520.

Silver Chart Pattern

There are no doubts about the state of silver’s price chart pattern – it is in a bear market. It has dropped more than 20% from its peak and is trading below the 200 day SMA. The 14 day SMA has slipped below the long-term moving average. The 30 day and the 60 day SMAs have turned down and may cross below the 200 day SMA in the near future.

Why is silver faring worse than gold? The answer probably lies in the fact that silver is not something you just buy and lock up in a bank vault. It has several industrial uses as well. With global manufacturing in clear de-growth, industrial demand for silver is declining. (The fall in copper prices are also due to this same reason.)

If you are still holding, use any price rise to exit. On the down side, the next supports are at 24 and 20.

Gold and Silver Chart Patterns: an update

Gold Chart Pattern

On a closing basis, gold’s chart appears to be forming a bearish ‘double-top’ reversal pattern, with two tops at 1900. The ‘double-top’ will get confirmed only on a drop below the ‘valley’ between the two tops. That means a drop below 1750. At the time of writing this post, gold’s price is at 1780.

In case of a convincing drop below 1750, gold’s price can move down to 1600. There is also the likelihood of a bounce up from the 1750 level, in which case the ‘double-top’ will be negated and instead, a rectangular consolidation pattern will get formed.

Gold’s price is still trading way above its 200 day moving average (not shown on chart), which means the bull market is very much intact. The present correction/consolidation – whatever it may turn out to be – should restore the technical health of gold’s chart for the next up move.

Silver Chart Pattern

Silver’s price chart hasn’t made much headway since my previous post two weeks back. A slightly lower top at 43.50 has been followed by a steady slide below the 40 mark. Looks like the price is headed down towards the support level of 38.

That level coincides with that of the 60 day MA (not shown in chart), so silver’s price is likely to bounce up and provide an entry opportunity. A break below 38 should find good support from the rising 200 day moving average - currently at 35.

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.

Stock Chart Pattern - Container Corporation of India (an update)

My previous post about the stock chart pattern of Container Corporation is almost two years old. The stock was consolidating within a symmetrical triangle after a strong rally that touched a peak of 1149 in July ‘09.

I had expected a correction down to the 50 day EMA or 200 day EMA because the stock was trading well above the 50 day EMA, and the gap between the 50 day EMA and 200 day EMA had become large (which precedes a correction or reversal). The technical indicators were also looking weak.

A trend reversal was ruled out because a symmetrical triangle is usually a continuation pattern. The logical break out was upwards, and a test of the all-time high of 1222 (reached in June ‘07) was on the cards before the correction. Let us take a look at the two years closing chart pattern of Container Corporation and observe what transpired over the past two years:

Several interesting patterns have formed on the chart, and I will take them up one by one. The expected upward break out from the triangle pattern took the stock’s price to 1235 on Aug 24 ‘09, just above the all-time high of 1222, before a correction ensued – or rather a consolidation within a flag (which is also a continuation pattern).

Note that the first down leg of consolidation within the flag was supported by the 50 day EMA in Sep ‘09. The upward bounce found resistance at 1222 in Oct ‘09. The next down leg pierced the 50 day EMA but stopped well short of the 200 day EMA.

The upward break out from the flag was not accompanied by a volume surge. No wonder the stock price consolidated sideways between 1222 – 1235 during the better part of Dec ‘09 before a high volume surge propelled the stock to a new high of 1321 in Jan ‘10.

The subsequent correction dropped below 1222, but found support twice on the line projected from the upper boundary of the flag pattern. Another volume surge in Mar ‘10 pushed the stock to a new all-time intra-day high of 1500 on Apr 22 ‘10. It turned out to be a ‘reversal day’ (higher high, lower close) – warning of a reversal of the up trend.

The first leg of correction found support from the rising 200 day EMA in May ‘10 and then again from the 1222 level, before rising to 1429 in Jul ‘10 – forming a bearish double-top pattern and confirming the trend reversal.

The stock has been on a down trend since then, preceding the correction in the broader markets. Except for a brief rally from Feb ‘11 to Apr ‘11, the downward slide has been unabated. Note that the bottoms in Feb ‘11 and May ‘11 occurred on the projected line from the top boundary of the flag formation!

The stock price has made a bearish ‘rounding-top’ pattern, which is clearly visible in the 200 day EMA. All four technical indicators are bearish, so the 15 months correction hasn’t ended yet. There is long-term support at 1010, and below that, stronger support is at 900.

The zero-debt company is fundamentally strong – practically a monopoly business that generates a ton of cash from operations, and pays regular dividends (twice a year since 2005). For the past few quarters, growth has been tepid and profits have been flat. That doesn’t really justify the 32.7% correction from the Apr ‘10 intra-day high of 1500 to the May ‘11 intra-day low of 1010.

Bottomline? The stock chart pattern of Container Corporation has undergone a significant correction. While another 10% correction can not be ruled out from current level, small investors would do well to start accumulating slowly instead of chasing after ‘cheap’ stocks.

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Apr 15, ‘11

S&P 500 Index Chart

Last week, weakness in the technical indicators had indicated a possible drop towards the rising 50 day EMA. A bearish rounding top formation saw the S&P 500 index chart slip down to test support from the 50 day EMA, only to bounce up and close the week just below the 1320 level. Is the correction over, or can the index drop some more?

Two of the three technical indicators are suggesting that a further correction or consolidation is likely. The MACD is still positive but has fallen below its signal line. The slow stochastic has dropped below its 50% level. The RSI bounced up from its 50% level, and may prevent a deep correction.

Macro-economic news continues to be unexciting. New unemployment claims rose above the 400000 mark. University of Michigan Consumer Sentiment index rose marginally, but remains almost 20% below its average value. High oil prices and rising inflation remain concerns. Two doses of QE have boosted the S&P 500 chart, but the time of reckoning may be near.

FTSE 100 Index Chart

The technical indicators were looking overbought last week, and I had mentioned the possibility of a correction in the FTSE 100 chart. The index made a bearish rounding top pattern, followed by an intra-day test of support from the 50 day EMA on Thurs. Apr 14 ‘11. The index bounced up, but closed a bit below the 6000 level – a 1% loss on a weekly basis.

The technical indicators are showing some weakness. The MACD is positive, but has changed directions and about to touch its signal line. The slow stochastic dropped from its overbought zone, but is above the 50% level. Likewise for the RSI. The correction may not be over yet.

Bottomline? The chart patterns of the S&P 500 and FTSE 100 indices are undergoing corrections. The failure of both indices to move above their Feb ‘11 tops leaves the door open for a bearish double-top reversal pattern. The double-tops will get confirmed only if the indices fall below their Mar ‘11 lows. The possibility should induce caution. Taking some profits off the table, and maintaining stop-losses will be the prudent option.

Stock Chart Pattern - Indraprastha Gas (An Update)

In the previous update in Apr ‘10, the stock chart pattern of Indraprastha Gas had met two criteria for a bearish double-top pattern, but had not met the third – a drop below the ‘valley’ of 205 between the two peaks at 248 and 247.

My recommendation for investors was:

‘Existing holders can book partial profits. New entrants can await a likely dip, or buy after a convincing move above 248.’

The one year bar chart pattern of Indraprastha Gas is an example of why small investors should consider such a fundamentally strong, debt free, cash flow positive, dividend paying, well managed company for the long term. That it has a monopoly in gas distribution in Delhi and the NCR region is an added attraction.

The double top at 248 did not get confirmed because the stock’s price never fell below 205. But investors did get an opportunity to enter when the stock fell to 215, where it received support from the rising 100 day EMA.

Earlier, the 248 level was breached on intra-day basis but continued to provide resistance to up moves till the middle of Jun ‘10. A high volume break out on Jun 17 ‘10 was followed by a pullback to the 248 level, which turned into a support and offered another opportunity to enter.

The stock rose quickly to 303 in Jul ‘10 on solid volume support, and after a brief dip to the rising 20 day EMA, rallied strongly to touch an all-time high of 374 on Sep 7 ‘10. A bearish ‘reversal day’ pattern preceded a correction down to the 303 level and an intra-day low of 295.

For the past 5 months, the stock has been consolidating sideways between 303 and 374, and has traded above the rising 200 day EMA. On Jan 31 ‘11, the stock touched an intra-day low of 296 – where it received support from the 200 day EMA and bounced up.

What next? There are bullish and bearish possibilities, and I’ll discuss both. First, the bullish arguments. Rectangular sideways consolidations are continuation patterns. That means the up trend before entering the pattern should resume. The bulls will take heart from the fact that despite a 21% correction from the top of 374 to the low of 295, the stock is trading above its rising 200 day EMA.

The bears have strong counter arguments. The stock touched a high of 374 again on Jan 3 ‘11, forming a possible double top. A breach of the 200 day EMA and the 295 level can take the stock price down to 248. Note that all four technical indicators reached lower tops when the stock touched 374 a second time. The combined negative divergences can push the stock price lower.

The technical indicators are all bearish. The MACD is below its signal line, and sliding lower in negative territory. The ROC is negative and about to drop below its falling 10 day MA. The RSI has re-entered the oversold zone after spending a few days above it. The slow stochastic found resistance from its 50% level and has turned downwards.

Bottomline? The stock chart pattern of Indraprastha Gas has been consolidating after a fabulous 300% rally from its bear market low of 92 to an all-time high of 374 (which was more than double its previous bull market high of 182 – far outperforming the Sensex). With the Sensex touching lower levels each day, there may be more selling pressure on the stock. Partial profit booking may be prudent. New entrants should bide their time.