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Wednesday, December 9, 2009

Stock Chart Pattern - Ratnamani Metals and Tubes

The stock chart pattern of Ratnamani Metals and Tubes had a spectacular run from a low of 32 on Mar 16 '09 to a high of 118 on Sep 16 '09 - gaining more than 250% in 6 months. The stock has subsequently been in a corrective mood.

Before getting into the nitty-gritty of the technicals, a few words about the fundamentals. A two-decade long presence in the stainless steel pipes and tubes segment; profit making and dividend paying, with positive cash flows from operations; low debt/equity ratio; low P/E; nearly 60% of the Rs 9 Crores equity held by the promoters; a recent order of Rs 150 Crores from GAIL; clients include IOC, HPCL, Reliance, BHEL.

All point to a stock that smart investors may want to include in their portfolio. Now let us see whether the one year stock chart pattern of Ratnamani Metals and Tubes is supporting the fundamentals or not:-


After hitting the recent high of 118, the stock has been in a sideways correction, well-supported by the 50 day EMA. Today's lower close has sent the slow stochastic tumbling into the oversold zone. The RSI has also dropped below the 50% level. Both indicators are suggesting a continuation of the correction.

The on-balance volume gives a completely different picture. For nearly three months, the stock has made a sequence of lower tops and bottoms. But the OBV is moving higher - a positive divergence and a clear indication of accumulation. So why am I not enthusiastically recommending a 'buy'?

Let us look at a more longer term chart pattern:-


The stock made a high of 302 on Jan 4 '08, from where it fell 89% to 32 in Mar 16 '09. Small cap stocks usually have trouble recovering from such a massive fall. At its recent high of 118, the stock retraced less than 32% of its entire fall of 270. Compare that with the Sensex, which retraced more than 70% of its bear market fall.

This is one of the reasons why investing in small cap stocks is so risky, and best avoided by small investors. The returns may be huge if you can enter at the early stages of a bull phase. But the fall in a bear phase can be soul-destroying.

Bottomline? Enter only if you have very high risk tolerance. If it can clear the recent high of 118, then it may reach 150 and even 180. If you like the pipes and tubes segment, there may be better opportunities elsewhere.

(Note: Thanks to reader Abhijit for suggesting this stock.)


rk77 said...

Ratnamani Metals and Tubes has finally moved out of its sub-hundred price zone reaching 118. Will it now breakout to 150-180 as indicated earlier? rk

Subhankar said...

Good observation, Dr K.

The stock has made a bullish saucer-like accumulation pattern. It is near the two previous tops, where it is facing some resistance. If it clears 125, it can reach the target mentioned.