Tuesday, July 18, 2017

ITC worst fall since 1992? What is next?

ITC is a heavy weightage stock in Nifty and Sensex. This stock has cracked down by more than 14% in the morning of Tuesday, 18th July 2017 i.e today, on back of The Goods and Service tax  (GST) council  raised the cess on cigarettes. This is one of the biggest fall in ITC since 1992!
With this new information prices have immediately adjusted itself to the new value. It is interesting to see how markets adjust the information quickly. This will also lead to change in chart pattern over short term.
However, the fact is that this is not for the first time Government is increasing the tax regime but this is very often with ITC on its cigarettes business. If one checks the past record, then government is under process of hiking excise duty on cigarettes every year. Hence this has become a norm for tobacco industry. 
We believe that such kind of news can result into short term volatility. The interesting thing to note down is that since 2013 there is continuance hike in excise duty on cigarettes but as against to that ITC share price has managed to gain by 39% from 2013 to 2017 i.e. from the high of 253 to the high of 355 made in the year of 2017. Isn’t it interesting?
In the early part of 2017, ITC rallied on back of the hopes that GST will boost the business and now GST is in place but with some tweaks in cess on cigarettes.  Due to the same ITC shares have corrected immediately. Markets are continuously is in process of discounting the future.  Now let us look at the medium to long term technical chart of ITC:
ITC weekly chart:

Technical outlook: In above we can see that prices have been intact in upward moving channel. In the last week of June 2017 and in the first week of July 2017 stock broke above the channel resistance and made high at 355 level. This suggests that up move post breaking the first parallel channel was false breakout and now prices can again start to respect the upward moving channel.  The zone of 255-260 should act as important support from where breakout was witnessed.
The above chart clearly suggests that even when there have been negative implications on ITC stock price due to duty or tax hikes the medium to long term trend resumed on upside after a brief correction. We can expect similar outcome even now. ITC can move lower over short term towards the support zone of 255 – 260 which will provide buying opportunity. Post this the original trend on upside should resume.
Please note the above analysis will hold true as long as the blue channel remains intact. The support as per this channel is near 220 levels on downside which will act as multi-year support level.
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