Markets
Railway stocks could be set for a strong finish to 2024
Summary
- Following a sharp October sell-off, technical indicators like the Definedge Railways Index's double bottom pattern suggest a bullish reversal, while seasonality trends show gains historically in November and December.
After a turbulent October marked by widespread selling across stock markets, some sectors are beginning to show signs of recovery, with the railway sector standing out. Despite a steep downturn in many railway stocks—some dropping over 20% from recent highs—the sector appears poised for a technical reversal, particularly in the short-term trend.
In 2023, the sector had posted a remarkable 92% gain, reshaping long-term chart patterns and opening new opportunities for investors.
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This article explores the technical aspects of the railway sector, delves into the concept of Equal-Weighted Indices, and analyses how both technical and seasonal factors could shape the sector's outlook as we head into the year’s final months.
Definedge Railways Index: A bullish reversal pattern
Without a dedicated sectoral index, the Definedge Railways Index serves as an Equal-Weighted Index for tracking the Railway sector’s performance.
An "Equal Weighted Index" is a stock market index where each stock holds equal weight, irrespective of its market capitalization.
This approach provides a more balanced view, preventing large-cap railway companies from overshadowing mid- and small-cap stocks that may be experiencing stronger growth.
The daily chart of the Definedge Railways Index reveals a bullish reversal pattern, signalling a potential upward trend for the sector. Notably, a Double Bottom formation emerged, with a breakout last week. This classic technical pattern often suggests a strong reversal from bearish to bullish conditions, typically forming after a prolonged downtrend as the price tests a support level twice, failing to break lower on the second attempt before rallying.
In this instance, the reversal occurs at the critical 200-Day Exponential Moving Average (200DEMA) Channel—a key indicator traders use to gauge long-term trend direction. The price finding support near this level, combined with a breakout above the neckline of the Double Bottom, signals growing bullish momentum as buyers seize the opportunity presented by this technical setup.
Further reinforcing this bullish shift is the Relative Strength Index (RSI), which has moved into bullish territory. An RSI reading above 50 generally indicates upward momentum and supports the case for a trend reversal.
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In summary, the Definedge Railways Index chart shows clear reversal signals, including a Double Bottom pattern at the 200DEMA and a bullish RSI shift. Together, these indicators suggest the Railway sector is entering a new phase of bullish activity.
Seasonality analysis: Historical performance of the railway sector
Beyond technical indicators, seasonality analysis provides another lens to assess the Railway sector's potential for a strong move. This approach examines historical performance trends for a stock, sector, or index during specific months or periods of the year.
For the Definedge Railways Index, seasonality analysis reveals some compelling patterns:
November: Over the past 24 years, the railway sector has averaged a 3% gain in November.
December: Performance strengthens further in December, with an average gain of 7.37%.
This seasonal strength in the year's final months presents an attractive setup for bulls seeking opportunities in the Railway sector. The alignment of these historical trends with current technical signals bolsters the case for a bullish outlook.
Do individual stocks mirror the sector’s performance?
While the Definedge Railways Index displays strong seasonal patterns in November and December, it’s essential to consider whether individual stocks within the sector reflect similar trends.
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Let’s examine the seasonality of prominent railway stocks to see if they align with the sector’s overall trends.
1. BEML
BEML, a major player in India’s railway and defence sectors, has shown robust bullish momentum on its daily chart.
For the first time since July 2024, the stock has formed a “higher high—higher low" pattern, a key bullish indicator in Dow Theory, signalling an uptrend as buyers consistently step in at higher prices. Supporting this technical setup, BEML recently broke out from a trading range, strengthening the bullish outlook. Notably, a shakeout below the 200DEMA channel likely trapped bears, setting the stage for a sharp rally.
The breakout, coupled with favourable seasonal trends, positions BEML as a strong candidate for the coming months.
2. TEXRAIL
Texmaco Rail & Engineering Ltd (TEXRAIL) is another promising railway stock showing signs of a bullish reversal.
On its daily chart, several bullish reversal patterns are visible, including:
Bullish Bat Harmonic Pattern: A Fibonacci-based reversal pattern that often signals a shift to an uptrend.
Double Bottom Pattern: Similar to the broader sector, TEXRAIL has formed a Double Bottom, indicating a potential reversal from a downtrend.
The stock is currently retesting the breakout level from the Double Bottom pattern, with support near the 200DEMA channel. This technical setup, along with favorable seasonal trends, positions TEXRAIL for a potential bullish move as 2024 draws to a close.
For more such analysis, read Profit Pulse.
In summary, despite the challenges of 2024, including a sharp October sell-off, the railway sector shows encouraging signs of a bullish reversal. Seasonality analysis adds to this positive outlook, with the sector historically gaining 3% in November and 7.37% in December.
Among individual stocks, BEML and TEXRAIL stand out due to their strong bullish chart patterns and alignment with sector-wide trends.
Disclaimer: This article is intended solely to share interesting charts, data points, and thought-provoking insights. It is NOT an investment recommendation. If you are considering an investment, please consult your financial advisor. This content is strictly for educational purposes.
About the author: Brijesh Bhatia has over 18 years of experience in India’s financial markets as a trader and technical analyst, with experience at UTI, Asit C Mehta, and Edelweiss Securities. He is currently an analyst at Definedge.
Disclosure: The author and his dependents do not hold the stocks discussed here, though Definedge clients may hold these securities.
