Wednesday, August 25, 2010

Stock Chart Pattern - Tata Chemicals Ltd (An Update)

The stock chart pattern of Tata Chemicals has been quietly moving up, away from the limelight, even as Tata Motors was grabbing all the headlines because of the turn around in the Jaguar-Land Rover acquisition.

The stock had closed at 274 back on Sep 16 ‘09 after a mild break out above a bullish ‘ascending triangle’ pattern. The negative divergences in the technical indicators and the comparatively lower volumes were not convincing enough. I had advised new entrants to await a correction.

A look at the one year bar chart pattern of Tata Chemicals reveals several text book examples of technical analysis:

Tata Chem_Aug2510

After the mild break out above the 270 level in mid-Sep. ‘09, the stock price reverted back into the ascending triangle, took support at the ascending trend line and once again had an unconvincing break out.

This time (in early Oct ‘09) it got support from the 20 day EMA and the 270 level and rose to 295. As the stock made a higher top, note that the MACD and RSI made lower tops. The negative divergences heralded the sharp 15% correction down to the 250 level, which was also the previous top of May ‘09 – and provided an entry opportunity to investors.

A ‘reversal day’ pattern on Oct. 30, ‘09 led to the next leg of the bullish ‘higher top – higher bottom’ pattern, that touched a high of 326 on Jan. 4, ‘10. Another ‘reversal day’ pattern, plus the negative divergences in the RSI and slow stochastic (which failed to make new highs) led to another 15% correction that stopped just above the 270 level.

A double-bottom was formed (at 275 in end-Jan ‘10 and 274 in end-Feb ‘10), providing another entry point to investors. A 2 months long bull rally followed, and rose to touch a new high of 356 on May 4, ‘10.

A ‘reversal day’ pattern (once again!) and negative divergences in the MACD and RSI (lower tops) caused a 17% correction down to the 200 day EMA and the Oct ‘09 top of 295.

A 2 months long sideways consolidation between 305 and 340 was followed by a high volume break out (on Jul. 30 ‘10), a pullback to the top of the consolidation zone (on Aug. 2 ‘10), followed by a high volume rally that touched a 2 years high of 412 on Aug 19 ‘10.

All three technical indicators are looking overbought and the stock has moved way above the 20 day EMA. A sideways consolidation has started and volumes are sliding. A possible correction may drop the stock to the support zone between 370 and 356 – which approximately correspond to the levels of the 20 day and 50 day EMAs.

The stock has gained 50% since I analysed it in Sep ‘09, comfortably outperforming the Sensex - which has managed barely an 11% gain during the same period.

Bottomline? The stock chart pattern of Tata Chemicals is an example of the kind of ‘boring’ stock young investors should add to their portfolios on dips. Chasing after publicity-seeking companies that are always in the news may be detrimental to wealth building. Existing holders can opt to book part profits, or hold with a stop-loss at 380.

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