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Friday, July 24, 2009

Stock Chart Pattern - Cranes Software

Some readers may question why I am even bothering to look at the chart pattern of Cranes Software, and they may be amply justified in doing so.

Here are some of the reasons why I like the company. Not only is it a software products company - and the breed is rare in India - it is a leader in the profitable niche of scientific research and engineering design simulation. Cranes owns some of the better known brands internationally, most of which were added to their products portfolio through judicious acquisitions. It also has tie-ups with leading international companies.

Mar '09 top line was at Rs 530 Cr, with 450 Cr realised from exports. In spite of the economic down turn, Cranes Software was able to generate Rs 124 Cr in profits after tax. Increasing cash flows from operations and regular dividends are other positive features.

So why is the market shunning the stock? It is the Rs 800 Cr debt, hanging like the proverbial shining sword suspended from the ceiling by a single horse's hair above the neck of the sycophant Damocles. The company is trying to raise around Rs 300 Cr by selling stakes in two of its subsidiaries.

The one year bar chart pattern of Cranes Software doesn't instill too much confidence at all - and therein may lie the seed of opportunity:-

Cranes_Jul2309

Ever since hitting a high of 174 (for this Rs 2 face-value stock) back in Dec '07, the stock has been sliding steadily down with very little sign of a bottom being in place. The recent low of 34, made on July 13, '09 is actually its 52 week low. Maybe, the double bottom formation will finally halt the long bear market phase.

The stock is well below its downward sloping 200 day EMA. The 50 day EMA is also quite a bit below the long-term average, and both EMAs are moving down. Last week's rally took the stock up to its medium-term average, where it faced resistance and moved down again.

The technical indicators are not encouraging. A volume spike on July 20, '09 took the stock to the 50 day EMA and the MFI to the overbought level. Subsequently volumes have come off somewhat. The RSI moved out of the oversold zone, but remains below 50% level. The slow stochastic shot up from its oversold zone and went above the 50% level, but the %K has now slipped below the %D line. The MACD is above its signal line but in negative territory.

Volumes have been sharply higher on recent up days - which hints at informed buying. There is good support at 39 and 34 levels. So watch out for any breach of these levels. If the company is able to raise the funds within the next 3 months or so, this stock could zoom. Should the stock manage an up move, resistance zones will be at 45-49 and 60-65.

Bottomline? The stock chart pattern of Cranes Software is a reminder of what can happen if the pursuit of growth by acquisition leads to too much debt. Even good cash flows from operations may not be enough to survive. This is not for the faint-of-heart. Intrepid investors should maintain strict stop loss at Rs 33.

(A question for readers: Why is the stop loss set at 33 and not at the 52 week low of 34?)

13 comments:

Taurian said...

The SL is set at 33 and not at 34, to avoid getting swept by a deliberate whipsaw by the informed buyers. Most investors wud keep the stops at 52W low of 34 or just a tad below it and if one really wants to buy big here, would deliberately take the price below the universal stop loss level to fill his bag. Thats how I understand it.

specialist said...

it will form a a triple bottom. when it hits 34 and if it bounces from there could be a breakout
The triple bottom is a reversal pattern made up of three equal lows followed by a breakout above resistance. While this pattern can form over just a few months, it is usually a long-term pattern that covers many months.

also as one can consider it to be a double bottom then 34 cud be a major support and if it breaks it cud go down further....

hope am correct

Subhankar said...

@Taurian: You nailed it, Tau. Yes, the exact level of support should be 32.80 as per the 3% 'whipsaw' rule. I rounded it off to 33.

@specialist: You are quite correct about the triple bottom pattern.

But the reason for keeping the stop-loss at 33 (i.e. 3% below the previous low) is to avoid a 'whipsaw'. The stock may fall to 33 or 33.50 and then start to move up again.

One should sell only when 33 (or 32.80 to be precise) fails to provide support.

rkhamsa said...

Subhankarji,
Wld appreciate your inputs on Cranes Sotware. I bought it at 60 & again at 35 to avg my cost.But it seems to be slipping down to less than 30. Is there any end in sight ? Shld I exit to minimise further loss or hold till it reaches atleast break-even at 45 or so ? Pls advise.

Subhankar said...

Things are not looking good for the Cranes stock. Technically, it is still away from finding a bottom, and has gone below the stop-loss level of 33 - where existing holders should have sold. It isn't a good move to average down - particularly in small cap stocks.

Fundamentals are worsening, the QoQ sales are dropping steeply, whereas the interest burden is increasing. A typical problem faced by small companies trying to grow big too fast by increasing debt.

I have no idea if and when the stock may reach your break-even level.

Rajesh said...

Thanks very much for your inputs.

Subhankar said...

You're welcome, Rajesh.

Hope my inputs helped in your decision making.

VJ said...

Subhankar, It appears that Cranes has given a confirmed trend reversal signal today (Inverted hammer)supported by huge volume

Subhankar said...

The stock has reacted after touching the 50 day EMA at 33. 33 was also a support level, which has now turned into a resistance level. Longer-term down-trend line is at 37 and the 200 day EMA is at 45.

Those are 3 strong hurdles the stock needs to cross. The huge volume may have been the result of a block-deal.

Narayanan said...

3FIIs have offloaded stake, high profits but low dividends, lots of subsidiaries...is something cooking?

Subhankar said...

No idea, Narayanan.

The technicals and fundamentals are both looking pretty bad.

CHINTAN PATEL said...

Looks like company is not preforming well.

Whole last year the company profit is in -Ve. Interest to be paid on rise and income from operation declining.

Do not touch at this moment.

Promoter has pledged 87% of the share owned

Subhankar said...

Yes, Chintan.

The weight of the huge debt is crushing the company's operations.