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Thursday, September 13, 2012

Stock Chart Pattern - Hero MotoCorp (An Update)

In the previous technical update back in Jul ‘11 (marked by grey vertical line on chart below), the chart pattern of Hero MotoCorp (formerly Hero Honda) was in the midst of a recovery from an intra-day fall below the 1400 level in Feb ‘11.

Termination of the long association with Honda of Japan had been the major reason for the fall in the stock’s price. Uncertainty about future technological inputs was compounded by Honda’s independent entry into the Indian two-wheeler market.

Shortly after the previous post, the stock price dropped to the long-term support/resistance level of 1700, only to bounce up smartly and rise to a new high of 2232 in Sep ‘11. Doubts about the future of this blue-chip company seemed to exhaust the enthusiasm of the bulls.

For the past 16 months, the daily bar chart pattern of Hero MotoCorp has been stuck in a rectangular band between 1700 and 2250 – testing the patience and resolve of long-term investors.

HeroHonda_Sep1312

The interesting thing to note technically is the behaviour of the 50 day EMA, as the stock price oscillated between the two extremes of the rectangular band. During Jan-Feb ‘12 and again during Jun ‘12, the 50 day EMA merged briefly with the 200 day EMA, but bounced up on both occasions.

However, on Aug 30 ‘12, the 50 day EMA dropped below the 200 day EMA – the ‘death cross’ that confirms a bear market. After a single day’s breach of the upper edge of the rectangular band on May 2 ‘12, the stock price has formed a bearish pattern of lower tops and lower bottoms – by touching a lower top in Jun ‘12 and a lower bottom earlier this month.

Technical indicators are bearish, but correcting from oversold conditions. MACD is negative, but has just crossed above its signal line. ROC has moved up sharply above its 10 day MA into positive territory. RSI is trying to emerge from its oversold zone. Slow stochastic has come out of its oversold zone, but remains well below its 50% level.

What should small investors do? Existing holders can continue to hold. The more adventurous may trade the range between 1700 and 2250. New investors can enter with a strict stop-loss at 1700.

There are fundamental reasons behind the suggestion. The company has recently tied up with an Italian design firm – its third technology tie-up after the ones with EBR, USA and AVL, Austria. Looks like the Munjals are working hard at competing with Bajaj Auto and Honda by getting access to latest technological inputs. Two wheeler capacities are being enhanced – both for scooters, which are selling well and for motorcycles, which are under some demand pressure.

Bottomline? The stock chart pattern of Hero MotoCorp has been consolidating within a rectangular band for the past 16 months. Long consolidations are often followed by strong break outs. Break outs from rectangles can happen in either direction. A drop below 1700 may lead to a test of the previous bottom of 1380. A break out above 2250, if accompanied by a volume surge, can take the stock to 2700.

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