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Wednesday, April 4, 2012

Stock Chart Pattern - Indian Hotel (An Update)

The previous update of the stock chart pattern of Indian Hotel – better known as the Taj Group – was posted back in Feb ‘11 (marked by the grey vertical line on the chart below). The following concluding comments were made then:

“The stock chart pattern of Indian Hotel is in a bear market. There is good support at 70, and below that, at 55. A bounce up on good volumes from those levels can be good entry points. This company is the crown jewel of the hotel industry, well-managed and in a class of its own - but is strictly for long-term investors.”

The stock has thoroughly tested the patience of long-term investors. But the usefulness of technical analysis is clearly exemplified below in the bar chart pattern of Indian Hotel:

Indian Hotels_Apr0412

The stock price consolidated within a rectangular zone between 67 and 74 for nearly 3 months (Aug to Oct ‘11), as it struggled to hang on to the support level of 70. Consolidation patterns tend to be continuation patterns, so the likely break out from the rectangle was downwards. Not surprisingly, the stock price dropped sharply below the rectangle in Nov ‘11 and proceeded towards the next support level of 55.

In Dec ‘11, the stock price dropped briefly below 55, only to form a double-bottom reversal pattern at 51. Observant readers will note the positive divergences in all four technical indicators, which touched higher or flat bottoms as the stock dropped lower from its Nov ‘11 low to its Dec ‘11 double-bottom. Even during the actual double-bottom, all four technical indicators touched higher bottoms.

These positive divergences signalled a rally, which coincided with the rally in the broader market. The stock rose past its three EMAs to touch an intra-day top of 80 on Feb 17 ‘12. But it turned out to be a ‘reversal day’ (higher top, lower close) that marked the end of the rally. The stock dropped below all three EMAs to return back to its bear market.

All isn’t lost for the bulls. In fact the drop to the recent low of 60 and the subsequent bounce appears to be a good entry point. Three of the four technical indicators are showing positive divergences (marked by blue arrows) by touching higher bottoms as the stock price dropped to 60 last month. 60 is a higher bottom than the previous bottom of 51. If the stock price can rise above its recent top of 80, a bullish pattern of higher tops and higher bottoms will get formed.

The technical indicators are hinting at such a possibility. The MACD is negative, but it has crossed above its signal line, and both are rising. The ROC has climbed above its 10 day MA into positive territory. The RSI is rising towards its 50% level. The slow stochastic emerged from its oversold zone, and moved sharply above its 50% level.

Bottomline? The stock chart pattern of Indian Hotel is trying to climb out of its long bear market. A move above 80 followed by the ‘golden cross’ of the 50 day EMA above the 200 day EMA will technically confirm a bull market. Conservative investors can wait for the confirmation to enter. The less risk averse can enter now with a stop-loss at 60.

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