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Thursday, July 16, 2009

Stock Chart Pattern - JK Lakshmi Cement

The stock chart pattern of JK Lakshmi Cement shows that it is one of those resilient stocks that are not too bothered by the gyrations of the BSE Sensex index.

The cement sector has not been a great favourite of mine. The large investments needed for expansion, frequent swings between shortages and over-supply, too many units of various sizes, regional market domination by different players, had all contributed to low margins for this cyclical sector.

The national highway project caused a sea change in the prospects of the cement industry. Coupled with the growth of the infrastructure and construction sectors led to a boom period for the industry. From a loss-making company at the beginning of this decade, JK Lakshmi Cement has turned around to become one of the smaller but stronger players.

What I like most about the company is its continuous efforts at cost reduction by building a captive power plant, a waste heat recovery system, and switching between different fuel inputs that increased profitability and generated a ton of positive cash flow from operations.

More details about the company can be found from this article. An analysis of the one year bar chart patter of the JK Lakshmi Cement stock follows:-

JKLakshmi Cement_Jul1509

The stock made a rounding bottom pattern before starting its rally a little ahead of the Sensex. From a low of 35 on Mar 3, '09 it hit a high of 116 on Jun 3, '09 - a rise of 230% in 3 months.

The BSE Sensex index made a huge upward gap on May 18, '09 and then went on to form a head-and-shoulders pattern. No such gap is there in the chart above, because the stock had already moved up on high volumes on May 14 and may 15, '09.

After hitting the Jun '09 high, the stock has entered a sideways consolidation between the levels of 95 and 116, with good support from the 20 day EMA, and correcting only 26% of the up move. The Sensex corrected 31.5% of its rise from 8047 to 15600.

The RSI and slow stochastic have both moved above the 50% levels. In the process, they have made higher bottoms while the stock remained flat. This positive divergence may lead to a further up move. The OBV is tracking the stock with a slight upward bias. But the MACD is below its signal line and moving down - a negative divergence.

Contradicting signals from technical indicators are not unusual when the stock chart pattern is consolidating. A breakout can go either way. This is what makes technical analysis so exasperating some times!

Bottomline? The stock chart pattern of JK Lakshmi Cement makes it a good candidate for investment. Wait for a breakout above 116 to add. On a break down below 95, await the down move to play out before entering.

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