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Friday, August 8, 2014

Technical updates – IFCI and Reliance Capital

This week, let us take a look at the long term charts of a couple of financial companies. Both were darlings of investors during the 2003-07 bull phase but had since fallen on bad times for different reasons.

IFCI had a lot of NPAs on its books and its CEO got involved in fraud. The next CEO got into a tussle with the government – which is the major share holder. The company tried for a banking licence but lost out to IDFC. It is now in the process of cleaning up its books.

Reliance Capital has some popular funds – like Growth and Vision - under its management. But Anil Ambani got embroiled in the 2G scam (though he managed to evade jail time) and investors pulled out of mutual funds big time during 2010-11.

The change in market sentiment after the Modi-led NDA came to power has affected the fortunes of both companies positively, as the charts below clearly show.

IFCI

IFCI_Aug0814

IFCI’s stock formed an inverse head and shoulders reversal pattern marking the end of a bear phase during Nov ‘11–Jan ‘12, and then rose sharply on strong volumes to touch a high of 47.50 in Feb ‘12. It then started the next leg of its long down trend from its Jan ‘08 top.

The stock dropped to a high volume ‘panic bottom’ of 27.65 on Aug 27 ‘12, and then dropped even lower to 24.85 on Sep 3 ‘12 before rallying to touch a high of 38.95 on Jan 7 ‘13. This time, it formed a head and shoulders reversal pattern and dropped down to a 3 years low of 18.60 on Sep 3 ‘13.

The stock price has been rallying since then, bringing all three EMAs to close proximity of each other (marked by light blue oval) in May ‘14. The sharp move that followed was backed by strong volumes. The stock price rose to touch a 2 years high of 44.25 on Jun 9 ‘14, but overbought technical indicators led to a correction that is trying to hold on to the support from its 50 day EMA.

The stock has a high valuation and is good only for trading. Long-term investors should stay away.

Reliance Capital

RelCap_Aug0814

The stock price of Reliance Capital formed a small ‘double bottom’ reversal pattern in Dec ‘11 that ended its bear phase. The subsequent rally rose to touch a high of 501.70 on Jan 4 ‘13, but negative divergences visible on all four technical indicators (marked by blue arrows) stalled the rally.

A sharp correction dropped the stock to a low of 301 on Mar 26 ‘13. The stock price then started a long consolidation within a ‘rectangle’ pattern. A high volume price spike caused an upward break out from the rectangle on May 13 ‘14.

The stock price rose to touch a 3 years high of 664.55 on Jun 9 ‘14. All four technical indicators entered their respective overbought zones. The stock has since been in a corrective mode, seeking support from its 50 day EMA. If the support breaks, the stock can drop to 501, or even lower – to the support level of 460.

I avoid any company that has the ‘Reliance’ name in it. You are on your own here!

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