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Thursday, September 6, 2012

Stock Chart Pattern - Exide Industries (An Update)

The previous update of the daily bar chart pattern of Exide Industries was posted back in Apr ‘11 (marked by grey vertical line on the left of chart below). The stock was recovering after a sharp correction from 180 (touched in Oct ‘10) to 112 (touched in Jan ‘11). The company is fundamentally strong, debt-free and a market leader in the auto-ancilliary space, but the concluding remarks in the post was: “Valuations are not cheap, plus margins are under pressure. Use dips to add.”

The stock price dropped after the previous post, but received good support from all three EMAs, which had converged together. As often happens when the EMAs converge, a sharp move followed. The stock price rose to a slightly lower top of 173 on Jul 20 ‘11, but formed a ‘reversal day’ pattern (higher high, lower close) that marked the end of the up move from the Jan ‘11 low of 112.

Note that during the last leg of the rally from May ‘11, all four technical indicators touched lower tops as the stock price rose higher. The combined negative divergences – marked by blue arrows – gave advance warning of an impending correction/consolidation.

Exide_Sep0612

What followed was another sharp correction that pushed the stock price below all three EMAs and into a bear market – from which it has been trying to extricate itself for a year. The stock price fell to a high-volume ‘panic bottom’ of 107 on Oct 25 ‘11 – falling lower than its Jan ‘11 low of 112.

An old stock market adage states: ‘A panic bottom seldom holds’. Sure enough, after a couple of attempts to bounce up, which faced resistance from the falling 20 day and 50 day EMAs, the stock price dropped to a new intra-day low of 99 on Dec 22 ‘11.

A couple of interesting patterns can be observed here. The stock made a ‘reversal day’ pattern (lower low, higher close) that marked the end of the intermediate down move, though volumes were not substantially higher. Three of the four technical indicators showed positive divergences by touching higher bottoms while the stock price dropped lower.

The subsequent uptrend is into its 9th month (marked by the blue uptrend line), but the stock price hasn’t been able to move convincingly above the long-term support/resistance level of 150. Why is a well-known market leader like Exide Industries struggling to get out of a bear market?

Apparently, the company botched up its sales strategy by concentrating on OEM supplies to auto makers and left the replacement market flank wide open for competitors. Since margins tend to be better in the replacement market, the company’s bottom line has suffered. Also, by entering the inverter manufacturing space, it has alienated other inverter manufacturers who used to source batteries from them. It may take a while before the company’s profits margins improve. The negative sentiment is providing an opportunity for small investors to buy the shares of this well-respected company.

Technical indicators are bullish, but correcting overbought conditions. MACD is rising above its signal line in positive territory. ROC is positive, but had climbed to far above its 10 day MA and is moving down. RSI has drifted down after touching the edge of its overbought zone. Slow stochastic is inside its overbought zone, but showing signs of slipping down.

Bottomline? The stock chart pattern of Exide Industries is trying to get out of the clutches of bears. It has hardly given any returns to investors over the past 12 months. The time to buy a good company is when some temporary setback has depressed the stock price. Accumulate with a strict stop-loss at the uptrend line (currently at 125). Add more on a convincing break out above 150.

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