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Saturday, November 15, 2014

Technical updates – Tata Chemicals and Tata Steel

Many companies in the Tata group have been undergoing restructuring and consolidation after the change of guard. Cyrus Mistry has focussed on cutting flab and exploiting synergies within group companies. Results are beginning to show. Return of bullish sentiment in the stock market following BJP’s majority in the general election has helped.

Inflation has been moderating. Low oil prices contributed to lowering inflation and the current account deficit. Recent raising of excise duty on petrol and diesel will reduce the fiscal deficit. Labour reforms announced in Rajasthan may gradually be introduced across the country. FIIs are encouraged by the calculated and deliberate way in which the government is introducing reform measures – but a lot still needs to be done.

After hitting 2 year lows during Aug-Sep ‘13, the stock prices of Tata Chemicals and Tata Steel are back in bull markets. That makes them good candidates for adding on dips.

Tata Chemicals

Tata Chem_Nov1414

The stock price of Tata Chemicals formed a small ‘double bottom’ reversal pattern in Sep ‘13 that ended a 9 months long bear phase. In a classic ‘trend change’ move, the stock quickly rose on surging volumes but faced resistance from its 200 day EMA in Nov ‘13; the subsequent correction dropped the stock to a higher bottom in Jan ‘14 – providing an opportunity to enter for those who may have missed out earlier.

The stock price climbed sharply above its 200 day EMA on a volume spurt, pulled back to provide another buying opportunity, and then soared away past its Jan ‘13 top. The stock closed at a 2 yr high of 424.70, but all four technical indicators are looking overbought and are showing negative divergences by failing to touch new highs.

Expect some consolidation or correction before the next leg of the up move. The stock has gained 77% from its Sep ‘13 low (66% on an annualised basis) – not bad for a large-cap stock.

Tata Steel

Tata Steel_Nov1414

Tata Steel’s stock ended a 7 months long bear phase by closing below the 200 level in early Aug ‘13. A ‘V’ shaped recovery, backed by high volumes, gained 50% within a month, but faced resistance from its 200 day EMA. After a brief correction down to its rising 50 day EMA, the stock crossed above its 200 day EMA into bull territory on a volume surge.

A pull back to the 200 day EMA gave another entry opportunity. The stock rose to form a small ‘double top’ reversal pattern in Dec ‘13 that initiated a 10 weeks long correction that dropped briefly below the 200 day EMA. The next rally rose to touch a 2 yr high of 560.25 in early Jun ‘14 – gaining a huge 182% in 10 months (almost 220% annualised). Cyclical large-cap metal stocks some times provide such spectacular gains – but one has to be nimble-footed to benefit from them.

The stock has been in a corrective phase for more than 5 months, but appears to have found support, and is looking poised to move up again. (Note how the 440 level has acted as a long-term support/resistance level.) Technical indicators have corrected overbought conditions. Some more correction or consolidation can’t be ruled out.

4 comments:

Atif Rahman said...

Ok..sir it means that the worst is over for Tata steel and now is the time to jump in. ..slowly & steadily..thanks

Subhankar said...

Remember to maintain a stop-loss.

Karthikraja K said...

Sir,
i can correlate your conclusion now also. Is there any chance for Tata chem and Steel to come down further technically?

Subhankar said...

Both stocks can correct some more. Tata Chem has a support zone between 350-375, which it is fast approaching. TISCO is threatening to fall below 200. Next support zone is 150-170.