Stock Chart Pattern - State Bank of India (An update)

The stock chart pattern of State Bank of India was last analysed more than two years back. A lot of water has flown down the Ganges since then, and the fortunes of India’s biggest public sector bank has almost waxed and waned with the river’s tides.

A change of guard at the top brought with it sweeping changes in some of the lending policies. The very popular but financially disastrous teaser home loan rates were scrapped. Cleaning up the balance sheet meant a one-time hit on the bottom line. The bad news came at a time when the overall market had begun correcting after a 20 months long bull run.

The effect on the stock’s price was dramatic, as the bears went on a vicious rampage. The stock not only dropped into a bear market, but lost more than 50% from its Nov ‘10 peak. Let us have a look at the 2 years bar chart pattern of State Bank of India and analyse whether it is a good idea to enter this beaten down stock:

The stock touched a new high of 2500 in Oct ‘09 – a full 100 points higher than its bull market top of 2396 in Jan ‘08. A corrective move followed; the stock’s price dropped more than 25% to a low of 1863 in Feb ‘10, and looked ready to enter a bear market. But the 200 day EMA provided strong support throughout Feb ‘10, and positive divergences in the technical indicators led to a strong bull rally.

The stock’s price struggled to move above its previous top of 2500 through most of Jul ‘10. A break out on a volume spurt in Aug ‘10 propelled the stock to an all-time high of 3515 on Nov 8 ‘10. Unfortunately, it turned out to be a ‘reversal day’ (higher high, lower close) that signalled the end of the bull rally. That wasn’t the only warning signal.

Note that all four technical indicators reached lower tops (marked by blue arrows) as the SBI stock touched its all-time high. The combined negative divergences also pointed to a correction – if not a trend reversal. Interestingly, the MACD formed a head-and-shoulders reversal pattern with a downward-sloping neckline during Aug through Nov ‘10.

The confluence of bearish signals had a disastrous effect on the stock’s price, which crashed to a low of 1709 on Oct 5 ‘11 – a 51% correction from its Nov ‘10 peak. Q2 results appeared good at first glance, but not so great on a more detailed look. The stock formed a ‘reversal day’ pattern backed by very heavy volumes today, and may drop down to test and break its Oct ‘11 low.

The technical indicators are turning bearish. The stock has formed a bearish pattern of lower tops and lower bottoms over the past year, and is trading below all three EMAs and the blue down-trend line. The downgrade of the banking sector by Moody’s couldn’t have come at a worse time.

Bottomline? The stock chart pattern of State Bank of India is deep inside a bear market, with no signs of bottoming out yet. If the Sensex has to revive, SBI has to revive as well – but it doesn’t look like a possibility any time soon. If you like the banking sector, look at HDFC Bank or even a Yes Bank. The PSU banks are increasingly looking less attractive.

Stock Chart Pattern - Navneet Publications (An Update)

The previous technical update of the stock chart pattern of Navneet Publications was posted about a year back. The stock had touched a new closing high of 74, but the technical indicators failed to reach new highs.

The negative divergences was an advance warning of a likely correction. The stock was trading at a high TTM P/E of 25.8, which led me to conclude as follows:

‘The stock chart pattern of Navneet Publications is looking a little overbought and ripe for a pullback. Existing holders may decide to book partial profits..’

On hindsight, the timing of my suggestion appears to be a bit fortuitous, as the stock started to correct from the very next day after my post. Let us have a look at the closing chart pattern of Navneet Publications to see how the stock has fared in the past year or so:

The stock’s price formed a head-and-shoulders reversal pattern during the months of Sep, Oct and Nov ‘10. There are two interesting and important points to note. First, the volumes – which spiked during the formation of the left shoulder and the head. During the formation of the right shoulder, volumes did spike up but was quite a bit lower. This is characteristic volume action for a head-and-shoulders pattern.

The second point – though this isn’t a ‘rule’ – is the ‘pullback’ to the ‘neckline’ of the head-and-shoulders pattern immediately following the break down below the ‘neckline’. Such pullbacks provide selling opportunities.

Head-and-shoulders patterns have measuring implications. A stock’s price is expected to fall the same amount below the neckline as the height of the head above the neckline. In this case, the head was at 74 and the neckline at 60, giving a downward target of (60 – 14 =) 46.

However, the stock dropped just below the rising 200 day EMA to 53 in Dec ‘10 before bouncing up above the neckline to 64 in Jan ‘11. Downside targets usually fall short, but this was a big miss – indicating the inherent strength of the stock. The stock eventually dropped to a slightly lower close of 52 in Feb ‘11 but on the bar chart pattern (not shown) it touched a slightly higher bottom.

Note the flat OBV indicator during Jan and Feb ‘11, when the stock price was correcting. The positive divergence hinted at a rally, which is still continuing. Another very interesting point is the behaviour of the 50 day EMA, which merged with the 200 day EMA for a few days in Mar ‘11 but never crossed below it.

Though the stock dropped almost 30% from its peak of 74 to its low of 52, a bear market didn’t get confirmed since the ‘death cross’ failed. The subsequent bullish pattern of higher tops and higher bottoms, and a rising 200 day EMA means that the stock is in a bull market - outperforming the Sensex and Nifty.

However, the bears will remain in the picture as long as the stock fails to move above its previous top of 74. The stock has given zero returns in the past 12 months (except the dividend) but has provided plenty of trading opportunities.

The technical indicators are mildly bullish. The fundamentals remain quite strong with positive cash flows from operations, and steady rather than spectacular growth in top and bottom lines. A good defensive stock for conservative portfolios.

Bottomline? The stock chart pattern of Navneet Publications is in a bull market. The rising OBV indicates accumulation by smart investors. Use dips to buy. Unlike most small-cap stocks, this one trades in decent volumes. However, the price volatility indicates that the stop-loss should not be set too tight.

Stock Chart Pattern - Castrol India (an update)

The previous write-up about the stock chart pattern of Castrol India was posted back in July ‘09. A lot of water has flown down the Ganges since then, and the chart has formed some classic technical patterns. It is a good time for an update.

This zero debt, profit-making, cash-generating lubricants company requires very little capital expenditure, pays regular dividends and has issued bonus shares several times – the most recent was a 1:1 issue in Apr ‘10. (All price levels in the previous post should be divided by two for comparing with current prices.)

The stock had a spectacular 52 months bull run from the intra-day low of Rs 77 (pre-bonus 154) in Jun ‘06 to the intra-day high of Rs 590.10 in Oct ‘10 – a 667% gain. That was just the capital appreciation. The total dividend payout was Rs 93. Including the dividend – a 787% gain (8-bagger returns!).

While savvy investors have been sitting back and raking in the ‘moolah’, small investors have been running after mythical multibaggers like Suzlon, Punj Lloyd and Bartronics. Let us have a look at the one year closing chart pattern of Castrol India:

Note the classic head-and-shoulders pattern that halted the long bull run. Why classic? Watch the volume action (marked by the thick blue down-arrows). A volume spike when the left shoulder (LS) was being formed; lower volumes during the head (H) formation (which itself ended with an advanced warning sign of a small head-and-shoulders pattern); even lower volumes during the right shoulder (RS) formation.

The volume spike on the day after the break down below the upward-sloping neckline was a sign that worse was to follow. The pullback attempt following the break down from the head-and-shoulders pattern stopped well short of the neckline and entered a bearish rising-wedge pattern.

Interestingly, the bear market rally in Dec ‘10 also ended with a head-and-shoulders pattern where the head itself formed a mini head-and-shoulders pattern. The down-trend finally ended on Feb 25 ‘11 - correcting about 27% from the Sep ‘10 top, shortly after the 50 day EMA crossed below the 200 day EMA (the ‘death cross’).

While the stock price dropped to its 52 week low, all four technical indicators reached higher bottoms (marked by blue arrows). The strong positive divergences gave a signal that the bull market was ready to resume.

The sharp recovery climbed past the 200 day EMA within a month, pulled back to the long-term moving average in end-Mar ‘11 – giving a good entry opportunity, and tested the Sep ‘10 top on a huge volume spike.

Negative divergences in all four technical indicators, which made lower tops, led to a drop down to the rising 20 day EMA. The stock price is completing a bullish rounding-bottom pattern. A likely test and breach of the Sep ‘10 top of 528 can take the stock to its 52 week intra-day high of 590 in the near term.

Will the bears go into hibernation? Very unlikely in the middle of summer. But the technical indicators are not holding out much hope for them. The MACD is positive, and has crossed above the signal line. The ROC is rising in positive territory above its 10 day MA. The RSI is about to enter the overbought zone. Only the slow stochastic is showing some weakness, as it is below its 50% level. All three EMAs are rising, and the stock is trading above them. The bulls are back in control.

Bottomline? The stock chart pattern of Castrol India endured a six months long bull market correction; in spite of the ‘death cross’ and the two months spent below the 200 day EMA, the bears could not take control. Like Colgate, this stock can be added at any price, and most definitely on dips and corrections.

Stock Chart Pattern - OnMobile Global (An Update)

The previous update of the chart pattern of OnMobile Global generated a fair amount of reader queries and comments, which implies that the stock finds a place in the portfolios of many small investors. Some bought at the IPO price of 440 during the previous bull market. Others entered at various lower levels, but have not really got much returns from the stock.

What is the reason for investor fascination with OnMobile? Is it because the company is in the high-tech field of telecomm software, and investors assumed that growth in telecomm subscribers would automatically lead to growth in the telecomm software field? Or, is it because one of the promoters is an ex-Infosys employee, and OnMobile was going to be the ‘next Infosys’?

The disappointing performance of the OnMobile stock has left many small investors bewildered. However, the company is backed by a strong balance sheet – unlike Bartronics or Cranes Software, which were also favourites of small investors. So, the likelihood of the company providing decent returns in the future is high. The overseas rollouts of the company’s software services (for Vodafone and Telefonica) have commenced. These should boost revenues and profitability.

But investors must appreciate that growth in telecomm subscribers does not necessarily translate into higher profits for telecomm software providers. The company  provides discretionary value-added services, which users may not opt for. And, the ‘next Infosys’ is a myth.

What does the 2 years bar chart pattern of OnMobile Global tell us?

The stock has been in a down trend since touching a high of 682 back in Jul ‘09. A bear market was confirmed by the ‘death cross’ (marked by blue oval) of the 50 day EMA below the 200 day EMA in Nov ‘09. A bearish pattern of lower tops and lower bottoms continues. As per Dow Theory, the down trend remains in force till it is reversed.

Note that brief moves above the falling 200 day EMA in Jan ‘10, Sep-Oct ‘10 and earlier this month were met with selling. This is typical of bear markets where one is supposed to ‘sell the rises’. The rally from the Feb ‘11 low of 181 found resistance at the long-term support/resistance level of 310 and has dropped quickly to the next support/resistance level of 255.

The announcement of the 1:1 bonus issue on Mar 7 ‘11 (record date still to be decided) has not helped the bulls to loosen the bear hug on the stock so far. Is there a possibility of a trend reversal any time soon? The positive divergences in the technical indicators seem to suggest as much. All four reached higher tops while the stock made a lower top (marked by blue arrows). The stock may also be in the process of forming an inverse head-and-shoulders reversal pattern – with the left shoulder at the Nov ‘10 low of 226; the head at the Feb ‘11 low of 181; the right shoulder is still being formed; and the neckline at the 310 level.

Announcement of the record date for the bonus issue and good Q4 results can be the catalysts for the stock to reverse the down trend. Till then, one can expect the stock to consolidate between 255-310. The near-term technical indications are weak. The MACD is positive and just above its signal line, but has reversed direction. The ROC is also positive, but has dropped below its 10 day MA. The RSI has dropped from its overbought region, but is above the 50% level. The slow stochastic touched its overbought zone, only to fall below its 50% level.

Bottomline? The stock chart pattern of OnMobile Global is showing signs of reversing the down trend. Good volume support on up days is an indication that the bad days may be getting over. A high volume break out above 310 will be the first confirmation of a trend change, and a buying opportunity. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will confirm a bull market.