Wednesday, June 3, 2009

Stock Chart Pattern - Cummins India

Yesterday I had analysed the stock chart pattern of IRB Infrastructure purely from a technical point of view because of the interesting double-bottom formation. I had very little idea of the fundamentals of the company and would not contemplate purchasing the stock because it belongs to a sector that I'm sceptical about.

No such doubts about Cummins India. It is just the kind of stock I like to hold for long term. A market leader in the manufacture of diesel engines of different sizes and used in different industries. A strong overseas collaborator which is also a client. Regular dividends. Good operating cash flows. Steady growth. Low debt. Low risk.

Stalwart stocks like Cummins India won't bring you overnight riches. Neither should you lock it up in a vault and forget about it. The way to benefit from such stocks is to be on the alert for the occasional longer term trading opportunities.

The 1 year bar chart pattern of Cummins India has a couple of notable formations:-


The chart pattern above shows a single bottom in a 'V' shape. Note that the bottom was formed on Mar 9, '09 - the day most world indices formed their bottoms. Both the fall to the bottom, and the subsequent rise, have been gradual and not as sharp as most other stocks.

From the bottom of Rs 148 the stock moved up to Rs 231 in 2 months for a decent gain of 56%. After a short consolidation came a volatile spurt on May 19, '09 - the day after the markets were shut due to extreme volatility after the election results.

The stock chart pattern of Cummins India then entered an interesting consolidation pattern called a 'symmetrical triangle'. The main criteria for such a formation - lower tops and higher bottoms with at least two tops and two bottoms touching the sides of the triangle - have been met.

Triangles can be quite fickle - with three possible options. The most likely one is an upward breakout that will be a continuation of the previous up move. The breakout must be on significantly higher volumes. If the breakout happens on low volumes, then it could be a 'false breakout' - termed an 'end run', with the stock eventually moving downwards.

There can be a downward breakout on low volumes - though a triangle is generally not a reversal pattern. Sometimes such downward breakouts can be 'false' on higher volumes, with the stock subsequently moving up. It is then termed a 'shakeout', i.e. a ploy by strong players to get rid of weaker hands (viz. retail investors) so that they can get back into the stock at lower rates.

The third option is the chart pattern meandering sideways on low volumes and eventually moving out of the triangle near its apex. This option, though possible, seems unlikely because of the increased volume during the triangle formation. This is rather unusual, and indicates possible accumulation.

The breakout - either upward or downward - should happen while the chart pattern is anywhere between half and three-quarters of the distance between the base of the triangle and its apex. The stock chart pattern of Cummins India is in that region now, so we can expect a breakout over the next few days.

The technical indicators are beginning to weaken - not unusual during a triangle formation. The slow stochastic and RSI have slipped down from overbought zones. The MACD is positive but has moved below its signal line. The ROC has dropped close to the mid-point.

Bottomline? Cummins India is a solid long-term portfolio stock, but it has moved up quite a bit from its recent bottom. In any case, one should wait for the breakout from the triangle to initiate action. Should the stock chart pattern break upwards, the next resistance is likely at Rs 350. On a downward breakout, support will be at Rs 230.

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