Stock Chart Pattern – Cairn India (an update)

In my previous post about the stock chart pattern of Cairn India a year back, the overseas promoters were trying to offload the company to the Vedanta group. A lot of water has flown down the Ganges since then, but the Vedanta group has still not been able to complete the Cairn acquisition. 30% owner ONGC raised objections regarding royalty payment, and the deal has been going around through various government departments. Every time it seems that the deal is nearing completion, some one throws a spanner in the works.

Recently, the shareholders voted for the proposal of royalty sharing with ONGC, followed by ONGC agreeing to provide a no-objection certificate subject to a binding legal agreement between the two owners on royalty sharing. Only a few minor procedures and approvals are left for the deal to finally conclude successfully.

A different problem has now cropped up. Several members of the top management at Cairn India, including the CFO, have left the organisation recently. Apparently, professional managers were apprehensive of working with Vedanta's Agarwal. In a specialised business like oil exploration, loss of top management staff may hamper future prospects.

How have the procedural delays regarding the acquisition and exit of top management staff affected the stock's price? The one year bar chart pattern of Cairn India shows that the damage has been substantial: 

The stock price had started correcting after touching a high of 368 in Aug '10. The correction continued till the stock price fell sharply to a low of 285 in Nov '10, well below the rising 200 day EMA. The recovery was equally sharp, but the price momentum slowed down and the stock price reached a lower top of 347 in Jan '11. Another bout of correction dropped the stock below its 200 day EMA once more, but to a higher bottom of 306 in Feb '11.

This time, the stock sailed past its previous top to a new high of 372 in Apr '11, but formed a 'diamond' reversal pattern that marked the end of the bull market. The 'diamond' can be thought of as a head-and-shoulders pattern with a bent neck line that has measuring implications. From the break out point - usually downwards - the stock price is expected to drop at least the same amount as the height of the 'diamond'. In this case, about 40 points.

Note that after breaking down below the 'diamond', the stock consolidated for more than a month between support from the 200 day EMA and resistance from a horizontal line drawn through the right apex of the 'diamond'. Eventually, the stock broke below the 200 day EMA on Jun 17 '11, and quickly reached its downside target over the next two trading sessions.

A recovery followed, and the stock managed to climb above the 200 day EMA on intra-day basis, only to face resistance from the horizontal line through the apex of the 'diamond'. Such 'coincidences' make technical analysis interesting. The bears decided enough was enough. Heavy selling dropped the stock deep inside a bear market, where it touched a low of 250 in Aug '11 - a 32.8% correction from the peak of 372.

A rally took the stock past its falling 20 day and 50 day EMAs, but fell short of the falling 200 day EMA. The stock is trading below all three EMAs and is in a bear market. The technical indicators are looking quite bearish. The MACD has crossed below its signal line into negative territory. The ROC has fallen steeply below its 10 day MA into negative territory. The RSI has dipped below the 50% level after reaching its overbought zone. The slow stochastic has descended from its overbought zone, and is below its 50% level.

Bottomline? The stock chart pattern of Cairn India is suffering due to technical and fundamental headwinds. If you are holding the stock, use any rise to exit. New entrants should await the acquisition deal to go through, and the stock to form a bottom. The Vedanta group has acquired a few companies in the metals and mining sector, but have no experience in the oil exploration business. Keep that in mind if you are contemplating an investment.

Notes from the USA (Sep 2011) - a guest post

Every one was expecting - or may be hoping - that Ben Bernanke would do something different to jump-start the US economy, after the failure of two rounds of Quantitative Easing. In typical Bernanke style, he had already taken much of the surprise element off the table by hinting at an Operation Twist. But when the actual announcement was made, global markets reacted negatively.

What exactly is this Operation Twist? Here is KKP's spin on it.

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Is the Fed Twisting the Future?


The US Fed announced Operation Twist.  What is the Fed ‘twisting’?  Most people that I have talked to (average Americans), do not even know this stuff was announced and going on (poll based on discussions with my neighbors at a party on Sat. Sep 24 ‘11)!


Basically, the Fed never does anything that affects the long term bonds or bond rates.  Rates are already so low that for those who wanted to refinance, they have already done so.  Fed always assumes that when it lowers the short term rates (which is the only thing in its control), the banks will react to the message that goes along with the rate change (at the FOMC meeting), and adjust the mortgage rates which are linked to the Prime Rate (usually).

The Fed also said that when mortgage-backed securities (MBS) that it owns right now is paid off, it will roll the money back into new securities that are linked to mortgages.  This means, it is also now trying to affect the mortgage rates, which would also go down with this move so that people can lower their mortgage payment (EMI) and spend the extra cash flow that they have received (and people here in the US sure do so).


The idea being that with lower interest rates on housing (long term rates of 10, 20, 25, and 30 year mortgage terms), people who are thinking about upgrading their homes would start going after a bigger loan and buy new homes.  Once the housing boom starts, there are tons of businesses that get the support needed and, hence revive the economy.   Homeowners who have a lot of home equity and are current on their mortgages may also be given an opportunity to refinance, freeing up cash flow that could be spent on buying a car, upgrading the home, and/or paying off other high interest loans.

The issue is that lower interest rates, or lower price of homes has not really triggered a buying frenzy.  That is because of two reasons.  First, banks are scrutinizing loan applications with a super-high-standard.  Everything has to be too perfect on the loan application, and any small element that points to risk, means that the loan officer rejects the loan.  Second, people who need new houses, and have one (or more than one) family member that may not have a job, or might have a weak job-income, or might not have the feeling of being secure in their current job, do not go out and make a big house commitment.  

A case in point is a single woman with a good job who wanted to buy a $325,000 home with $50,000 down payment, and $275,000 in loan was denied.  This is according to one of our neighbors who is livid about how the banks have tightened their purses for some unknown reasons.  Corporations, Banks and People (who have cash), are all ‘holding back’ due to the unknown future.  This is actually creating a ‘bigger’ issue than what it would really be.   So many of us are living normal lives in this recessionary environment, but we all have a fear of the future, which is what makes all of us spend less, conserve more, and wait for a brighter day (my personal situation is different, since I am capitalizing by buying real estate, which is exactly what the government is trying to do by keeping short term interest rates near zero).


Fed wants banks to loan money, which is why they had provided the TARP funding.  A lot of the TARP funding is being returned by the banks.  There are announcements that show this return of funds that is on-going, and even a couple of bank VPs told me this in confidence.  They are afraid to tap into it, loan the money, and lose profits (and capital) by loaning it to someone, specially if the economy gets worse.  In reality, the central bank requires banks to keep a certain level of reserves on deposit at the Fed.  Legislation passed in 2006 permitted the Fed to start paying interest on those reserves starting in 2011.  This requirement of reserves and ratios by the Fed makes the loan officers reluctant to give out loans to people with the smallest risk.

Group of 20 finance chiefs are pledging to address rising risks to the global economy and are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy,” confirmed in a statement in Washington.  These officials cited “financial system fragility” and “heightened downside risks from sovereign stresses” among the threats to growth.  They said they will ensure banks are adequately capitalized and have access to liquidity, while reiterating an aversion to volatility in the currency markets.  This support model is what we need to keep our world spinning and continue e-commerce for the world to survive.  It is amazing that we are fearing a collapse when there is everything in abundance!


So, all in all, what is the ‘twist’ in the Operation Twist?  The twist really is that the Fed is trying to affect long term rates or mortgage rates without really dipping in any huge way into a QE3, which would have affected how investors around the world view the US.


Daniel Gross’s Upshot View: This move by the Fed is better than doing nothing. But there's no reason to think it will make the difference between unsatisfying and satisfying growth.   
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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Why small investors should emulate a convicted murderer in Texas

The Texas Department of Criminal Justice executes more condemned men than any other state in the USA. Traditionally, condemned men were granted a last request. Most death-row inmates chose to have an elaborate last meal before going to the ‘gallows’.

This practice has recently been stopped, thanks to convicted murderer Lawrence Russell Brewer – a member of a white supremacist gang who brutally murdered a black man by dragging him behind his truck for several kilometres before dumping his decapitated body near a cemetery.

Brewer ordered the following last meal before his execution:-

• Two fried chicken steaks with gravy and sliced onions
• A triple-patty bacon cheeseburger
• A cheese omelette with ground beef, tomatoes, onions, bell peppers and jalapeno peppers
• A bowl of fried okra with ketchup
• One pound of barbecued meat, accompanied by half a loaf of white bread
• Three fajitas
• A meat lover’s pizza
• A pint of Blue Bell ice cream
• A slab of peanut butter fudge with crushed peanuts
• Three root beers

No human being can possibly consume all that food in one sitting. In fact, when the meal arrived, Brewer refused to eat by saying he wasn’t hungry. He was deliberately manipulating the system. He ordered whatever he felt like, because he could – and then declined to eat it.

What does this bizarre tale have to do with small investors? The stock market displays a smorgasboard of alluring stocks from junk companies with questionable promoters that trap unwary small investors. After losing their shirts, small investors complain about ‘operators’ manipulating the system to deprive them of their savings.

Be a smart investor instead. Substitute each of the junk food items in Brewer’s last meal with companies like Cranes Software, Karuturi Global, Bartronics, Punj Lloyd, Suzlon, IVRCL, Delta Magnets, Reliance Communications, Kingfisher Airlines, Temptation Foods (!). Then ‘manipulate’ the system in your favour by refusing to buy any of their stocks. Only buy stocks of well-respected companies with proven managements at reasonable valuations, and you will never go wrong.