CMP Rs430, Target Rs550, Upside 28.2%
Tata Coffee after hit an all time high of Rs474 in June and the stock has retraced nearly 50% of the intermediate uptrend which resumed May’10, providing decent opportunity for accumulating the stock at current levels. As the correction unfolded into a classic zig zag formation, we expect wave 3 of intermediate degree is likely to begin from hereon and travel 1.61 times of wave 1.
Applying the change of polarity principle, the stock is back towards its support levels coinciding with earlier breakout levels of ‘Running’ triangle, which corresponds at Rs424 levels. Last week, the stock has convincingly closed above Rs424 with ease; long-term observation reveals steady uptrend in the counter. The levels of Rs424 which earlier acted as a major top since 2006, is likely to turn out to be a solid base for commencement of buying momentum from hereon.
As per Dow Theory, whenever any stock or index conquers a new territory and is able to hold above its earlier top (which may have lasted for several years), it means that the stock is in a long-term uptrend. The next leg of rally should take prices further to new highs confirming higher top and higher bottom formation.
The movement in weekly oscillator is quiet interesting. The weekly MACD after entering overbought zone in the month of Sept’09 has managed to retrace 61.8% along with breakout from falling resistance line. Such a move signals an end of consolidation phase and buying momentum is all set to take prices to new highs.
On daily chart, correction from the peak of Rs475 has led to formation of ‘Flag’ pattern, which is characterized by continuation pattern. Applying ‘swing’ principle to the same, we project an immediate target at Rs530 on conservative basis.
Being a commodity driven stock, it will be apt to look at the long-term chart of international Coffee traded at NY CSCE. The price pattern indicates extreme bullishness after it broke above the falling resistance line which persisted for several years. Prior to the breakout, prices formed an inverted head & shoulder pattern on quarterly chart and hence we can expect upside of 50-60% from current levels in the commodity in the coming quarters. Theoretically, appearance of trend reversal pattern prior to a breakout reduces probability of a whipsaw.
We thus advise buying Tata Coffee at current level of Rs430 with stoploss of Rs375 for Target of Rs550.