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Friday, October 19, 2012

Stock Chart Pattern - Sesa Goa (An Update)

In the previous update to the stock chart pattern of Sesa Goa – posted on May 17 ‘11 (marked by grey vertical line in chart below) – it was observed that the stock had slipped into a bear market while forming a pattern of lower tops and lower bottoms.

Though the company, which is India’s largest private sector iron ore exporter, remained a cash cow, it was facing fundamental and technical headwinds. Ban on export of iron ore from Karnataka and tax on iron ore exports had weakened the company’s balance sheet. Ban on export of iron ore from Goa appears to have broken its back.

In the concluding remarks of the previous post it was mentioned that it was a good portfolio stock for long-term, patient investors. A ‘buy’ was recommended on a convincing break above the 200 day EMA, with a stop-loss at 255. The chart below shows that a buying opportunity never occurred.

Sesa Goa_Oct1912

The stock price received good support from the 255 level for the next couple of months following my previous post, but once it broke down below 255 in Aug ‘11 the down move gathered pace till it hit a low of 149 in Dec ‘11.

The subsequent rally coincided with the rally in the Sensex. The stock price rose sharply above all three EMAs to touch an intra-day high of 270 on Feb 17 ‘12. But it turned out to be a high-volume ‘reversal day’ – higher high, lower close – that signalled the end of the intermediate up move, and extinguished brief bullish hopes.

Was the strong move above the 200 day EMA a buying opportunity? Hind-sight is always 20-20, and the answer is obviously ‘no’. But what should an investor have done in Feb ‘12?  There were three technical ‘red flags’ at the time:

  1. The stock failed to cross above the 255 level on a closing basis despite a couple of intra-day breaches. A support level, once breached, usually becomes a resistance level.
  2. The 50 day EMA was trading below the 200 day EMA. Even the 20 day EMA had failed to cross above the 200 day EMA.
  3. Three of the four technical indicators – ROC, RSI, slow stochastic – were looking overbought and touched lower tops while the stock price touched a higher top. The combined negative divergences hinted at a change of trend.

All three taken together were suggesting a clear ‘avoid’. The stock price fell below all three EMAs and reverted back to a bear market. So, is now a good time to enter? Only if you don’t believe the old market adage: Never try to catch a falling knife. What if you are holding from higher levels? Get out now. Sesa Goa declared awful Q2 results because production is almost at a standstill.

Bottomline? The stock chart pattern of Sesa Goa continues to show the effects of fundamental and technical headwinds. Vedanta group’s tactic of leveraging the company’s cash pile to acquire Cairn India has proved disastrous for investors. Regulatory issues have further compounded the problem. A blue-chip company has been brought to its knees. Stay away.

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