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Thursday, February 9, 2012

Stock Chart Pattern - IRB Infrastructure (An Update)

The previous update on the stock chart pattern of IRB Infrastructure was posted almost two years back. The stock appeared to have made a double-top at 280, which was much higher than the minimum target of 229 mentioned in a prior post, and readers were advised to book partial profits. Was it good advice?

A look at the two years bar chart pattern of IRB Infrastructure will reveal that the advice was timely, even though the stock did rise another 10% to touch an intra-day high of 313 on Aug 24 ‘10:

IRB Infra_Feb0912

The stock did not form any discernible reversal pattern, except that it formed a ‘reversal day’ pattern (higher high, lower close) on the day it hit its peak of 313. Reversal day patterns typically mark the end of an intermediate rally (or correction), but some times they can form at bull market tops and bear market bottoms – giving a very small window of opportunity to buy/sell.

This is why partial profit booking should be done when targets are met on the upside. Likewise, slow accumulation should be started when downward targets are met. It is next to impossible to catch the exact tops and bottoms.

The stock price started to correct rapidly and dropped below the 200 day EMA in Oct ‘10. It attempted a bounce back above the long-term moving average, but faced resistance form the falling 50 day EMA. A sharp fall below the 200 level in Nov ‘10 coincided with the ‘death cross’ of the 50 day EMA below the 200 day EMA – confirming a bear market.

All up moves faced resistance from the falling 50 day EMA till the stock dropped to an intra-day low of 150 in Feb ‘11. This time, the up move managed to climb above all three EMAs, but failed to clear the 229 level. Interestingly, 229 happened to be the top touched in Aug ‘09 – and the minimum upside target mentioned in an earlier post in Jun ‘09.

The dark blue down trend line drawn through the tops at 313 and 229 ruled IRB Infrastructure’s chart pattern till it touched an intra-day low of 121 on Jan 3 ‘12 - a 61.3%drop from the peak of 313 – underperforming the Sensex by a huge margin. Such are the risks associated with mid-cap (and small-cap) stocks. They tend to outperform in bull markets and underperform in bear markets.

The ongoing rally from the Jan ‘12 low has risen more than 20%, crossed above all three EMAs and the down trend line. The first two of the four criteria of a bull market (mentioned in a recent post) have been met. The rising 20 day EMA has crossed above the rising 50 day EMA and is about to cross above the 200 day EMA.

The technical indicators are correcting from overbought conditions. The MACD is positive, but has changed direction and dropped on to its signal line. The ROC crossed below its 10 day MA and fell all the way down to the ‘0’ line before bouncing up a bit. Both the RSI and the slow stochastic have dropped from their overbought zones. Expect some consolidation and a possible pullback to the down trend line.

Bottomline? The stock chart pattern of IRB Infrastructure is poised to change trend and enter a bull market. Many mid and small-cap stocks are showing similar chart patterns – on the verge of re-entering bull markets, thanks to relentless FII buying. Use dips to enter, but with a strict stop-loss. Q3 result was so-so – flat net profits on a slight increase in turnover.

1 comment:

Subhankar said...

IRB Infra director is a suspect in the murder of an RTI activist:

http://www.indianexpress.com/news/shetty-murder-cbi-to-conduct-polygraph-test-on-7-policemen/944714/