Wednesday, May 6, 2009

Stock Chart Pattern - Balrampur Chini

Enough of gloom and doom. In this week's stock chart pattern discussion, I will discuss some thing sweet, for a change. Though I've never quite understood the intricacies of the sugar sector, I do know that the one stock to own in this space is Balrampur Chini.

A look at the 3 months bar chart pattern of Balrampur Chini will show how the trend change in an individual stock gradually takes shape:-


(Please right-click on the image above and open it in a new tab or window for a better view.)

The stock closed above its 200 day EMA on Apr 8, '09 and since then has stayed above the long term moving average. That was the first indication of the stock entering a bull phase.

Around the middle of April '09, the 20 day EMA moved above the 200 day EMA from below, just about the time that the 200 day EMA flattened out and started rising. Those were the second and third indications that the stock was in a bull phase.

Volumes increased significantly throughout April '09 and hugely spiked up (nearly 5 times its average volumes over the past 3 months) in yesterday's trade. So the volumes confirm the change of trend.

As an investor, what should you do? Is this a good time to enter? To answer those important questions, let us look at the other technical indicators.

The 50 day EMA is moving up but is still below the 200 day EMA. That will be the final confirmation of the trend change. Looks like it will happen soon enough.

The slow stochastics moved down from overbought zone and is again going up, with the %K above the %D line. This is a bullish sign.

(It is interesting to note what happened in early Mar '09. The slow stochastics moved up from the oversold zone with the %K line bouncing off the %D line on Mar 18, '09. That was the first indication of the uptrend to follow. The RSI also moved above the oversold zone around the same time. The MACD and ROC gave 'buy' signals somewhat later.)

Currently, the MACD and its signal line have flattened and are touching each other, indicating indecision. But both the ROC and RSI are moving down while the stock has made a new high. Both are negative divergences, and is bearish.

On the long term charts, Balrampur has moved up from its 52 week low of 30 in early Dec '08 to hit 81.50 today (a rise of more than 160%). The move from its previous and higher low of 42 in early Mar '09 has been a whopping 95%.

But, today's trade was also a 'reversal day' - a higher high and a lower close than yesterday's trade. Even if the stock doesn't have a big fall, it will definitely encounter some profit booking after a huge rise.

Bottomline? Commodity sector investments can give phenomenal returns if you know how to ride the cycle. Sugar is also a sector that has huge political implications, with majority production in the heartland of India. I would wait till the election results come out before entering.

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