Cup and Handle Formation
The weekly chart of Biocon suggests that it is on the verge of breaking out from 4-year ‘Cup and Handle’ formation. The Cup formation ensued in October 2010 after it failed to sustain a run-up from Rs273-473. Since then, the stock has seen a steep decline and thereafter a steady recovery from low of Rs208 in July 2012.
The stock failed to sustain at higher levels after breaking past its previous peak in January 2014 which led to a phase of consolidation on the weekly chart. This period of sideways movement can be best described as a “Handle”, which is visible on the right hand side of the cup in the chart below. A breakout from the handle is likely to signal a continuation of the prior advance. In April, Biocon had a false breakout from this pattern and the stock retraced lower.
Breakout after a consolidation of 6 months
However, after six months of sideways consolidation in a flag pattern, the stock appears to have given a breakout on the daily chart as it surpassed its previous peak with higher-than-average volumes. Prior to this breakout, during the process of consolidation, handle had retraced up to ~1/3rd of the previous up-move which indicates bullish bias in the stock.
Upside momentum likely to continue post the breakout
The ferocity of the up-move, once the resistance of Rs515 is broken, could lead to a sharp rally in the stock. Technically, the stock is showing strength and given the positive oscillators set-up, the stock could outperform in the medium-term as long as it sustains above the neckline of Rs480. We recommend a BUY on the stock for a conservative target of Rs635 with stop loss of Rs445.
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