Thursday, August 9, 2012

Stock Chart Pattern - Castrol India (an update)

In the previous update (on Jun 8 ‘11 – marked by grey vertical line on the left of the chart below) to the stock chart pattern of Castrol India, the following were the concluding remarks:”Like Colgate, this stock can be added at any price, and most definitely on dips and corrections.”

The daily bar chart pattern of Castrol India shows the wonderful buying opportunity the stock provided by dropping to a low of 385 in Dec ‘11:

Castrol_Aug0912

Note the small double-top reversal pattern (labelled T1 and T2) formed back in Jul ‘11 – about a month after my previous post – which marked the end of the 200+ points intermediate rally from the low of 380 touched on Feb 28 ‘11 (not shown in chart). The volume bar on Jul 5 ‘11 during the first top (T1) was much taller than the volume bar on Jul 18 ‘11 during the second top (T2). This satisfied the first condition of a double-top. Once the price dropped below 544 – the ‘valley’ point between the two tops – the second condition for a ‘double-top’ got confirmed. That was the first signal to book profits.

It is not easy to follow these technical signals while they occur. However, after dropping below the 20 day EMA, the stock price bounced up on good volume support to touch a lower top of 569 on Aug 4 ‘11. That gave a stronger signal to book profits. The stock gave additional profit booking opportunities by consolidating within, and breaking down from, two ‘rising wedge’ patterns.

The stock finally stopped falling after touching a slightly higher bottom of 385 in Dec ‘11 (the previous bottom of 380 was touched in Feb ‘11). The subsequent rally initially coincided with the rally in the broader markets, before the stock continued its upward march by forming a bullish pattern of higher tops and higher bottoms. The spike in volumes as the stock crossed its 50 day EMA and 200 day EMA, followed by a pullback to, and upward bounce from, the 200 day EMA provided buying opportunities.

The ‘golden cross’ of the 50 day EMA above the 200 day EMA technically confirmed a return to a bull market. As the stock price rose to touch a higher top in Apr ‘12, all four technical indicators touched lower tops (marked by blue arrows). The combined negative divergences led to a correction and the stock briefly dropped below its 200 day EMA – giving no returns for the 12 months period from the previous post on Jun 8 ‘11.

However, partial profit booking in Aug and Sep ‘11 and buying back in Dec ‘11 and Jan ‘12 would have given decent returns. Such a strategy may not work with every stock, and should not be tried by small investors. But when the stock is a Colgate or a Castrol, then partial profit booking and buying back at lower prices is a great way to enhance returns.

The recent high volume price spike has been due to the announcement of another 1:1 bonus issue in Jul ‘12. The stock price has corrected from an overbought condition after touching an all-time high of 634 on Aug 6 ‘12. The price may correct a bit more, which would be a good opportunity to get in for new investors. A better opportunity may be to wait for a likely price correction after the bonus shares are credited to demat accounts of existing shareholders.

Bottomline? The stock chart pattern of Castrol India took investors on a roller-coaster ride over the past 2 years – swinging between 590 and 380. Those who held on for the ride have been rewarded with two 1:1 bonus share issues - not to forget about the substantial dividends. To build wealth, small investors should concentrate on ‘expensive’ stocks like Castrol and Colgate, instead of chasing after ‘cheap’ mythical multibaggers.

4 comments:

Amitayu said...

Castrol .. It’s more than just oil, it’s liquid engineering. Subhankar any thought about Crisil?It may touch 52 weeks low soon.Could you please tell when to enter this AAA stock?

Subhankar said...

Good question, Amitayu.

I don't track CRISIL and have very little idea of its fundamentals. The chart looks like it is falling off a cliff. If it falls below 850, it can drop to 700.

rk77 said...

Facing headwinds due to slowdown in vehicle industry CASTROL continues to move between 300 and 320 and does not seem to be going anywhere.

Subhankar said...

Castrol has announced a 50% reduction in share capital by reducing the face value of each share from Rs 10 to Rs 5. Rs 5 per share will be returned to shareholders. This effectively reverses the 1:1 bonus issued last year.

Colgate had done a similar exercise 4/5 years back when they reduced their capital by 90% and returned Rs 9 per share to shareholders.

Stock price should perk up a bit on the news.