Thursday, August 27, 2009

Stock Chart Pattern - Carborundum Universal

The stock chart pattern of Carborundum Universal, much like the chart pattern of Havell's discussed yesterday, is forming a bullish 'ascending triangle' formation that could lead to an upward breakout.

Why is a conservative, 55 year old abrasives and refractories manufacturer from the Murugappa stable quoting at a P/E of 22? Is it because of its shareholder friendliness, giving regular bonus issues and dividends? Or, is it the conservative and prudent management that believes in growing slowly and steadily, keeping debt under control and using cash generated from operations to part finance the growth? Or, is it due to the carefully managed global ambition being achieved through judicious acquisitions in India, Russia and South Africa plus a joint venture in China?

In spite of several bonus issues, the current equity is only Rs 18 Crores, and with reserves at 20 times the equity, can another bonus issue be around the corner? Promoter holding of 43%, FII holding of 9%, debt-to-equity ratio less than 1 are other positives for taking a closer look at the Carborundum stock.

The one year bar chart pattern of Carborundum Universal is another example of how Fibonacci retracement levels appear time and again on stock charts:-


After hitting a peak of 215 (face value Rs 2) on Jan 12, '07, the stock fell into a long bear market that ended with a double-bottom - 76 on Oct 27, '08 and 77 on Mar 25, '09. The subsequent rally took the stock to 140 on June 1, '09 - retracing 46% of the entire fall.

A double-top made on June 23, '09 resulted in a good correction down to 101 on Jul 13, '09 - just less than the 61.8% Fibonacci retracement of the rally. A sharp rally temporarily breached the double-top of 140, only to find resistance at 145 - the exact 50% Fibonacci retracement of the fall from 215 to 76!

In the process, a bullish 'ascending triangle' has formed on the chart, with a strong probability of a break out upwards. Increasing volumes of late - though not clearly visible on the chart - are supporting the rally. The negative divergences in the technical indicators - the RSI, MFI, MACD and slow stochastic have all made lower tops - are concerns that the up move can face headwinds.

Bottomline? The stock chart pattern of Carborundum Universal may give an upward breakout. Investors should wait for the breakout before entering (keeping the 3% 'whipsaw' leeway in mind).

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