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Wednesday, February 24, 2010

Stock Chart Pattern - Cummins India (An Update)

The stock chart pattern of Cummins India was in a consolidation phase after a sharp up move post election results when I had taken a look at it in early June '09. At that time, the consolidation pattern had met the criteria of a 'symmetrical triangle'.

Three possibilities about the direction of the subsequent move were discussed, and I seek the readers' indulgence in repeating them here:

'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.'

Let us now take a look at the one year bar chart pattern of Cummins India:-


The consolidation pattern (near the lower left of the chart) extended up to the first week of July '09, forming a rectangular 'flag' pattern between 250 and 300 levels. A 'flag' is a more reliable continuation pattern than a 'triangle'. It was no surprise that the stock moved upwards subsequently.

Before that, there was a neat little 'shakeout' pattern as the stock broke below the 250 level to 235 on Jul 13 '09 and then formed a 'rounding bottom' pattern for the rest of July '09 on increased volumes before breaking out upwards.

The 'flag' pattern after the low of around 150 in Mar '09 and the top of the flag at 300 in June '09 gave a minimum target of 450 - which was achieved in Jan '10.

Price targets often overshoot on the higher side in bull phases, and the stock went further up to make a high of 487 on Feb 4 '10. A fortnight later, it tested the previous high but fell short as it reached 484 on Feb 19 '10.

That formed a bearish 'double top' from which the stock price corrected down to the 50 day EMA before closing at 451. The 200 day EMA is moving up smoothly as the stock price remains almost 100 points above the long-term average. The bulls are still in control.

In the longer term 3 year chart, the stock had made a similar 'double top' bearish pattern - 463 on Sep 27 '07 and 462 on Oct 17 '07 - before entering a 17 month long bear phase well ahead of the Sensex:


So, is this the beginning of another long bear phase? Who knows? Technical analysis is not a science, and there are no guarantees that chart patterns will repeat. But this is an excellent opportunity to book partial profits in the stock.

Bottomline? The stock chart pattern of Cummins India (a fundamentally strong stock) shows why investors should bother less about the daily Sensex movements and concentrate on individual stocks. Every 2 or 3 years, the stock seems to provide opportunities to buy below 200 and sell above 400. Wealth-building can't get easier than this!

(A question for keen observers: is there a technical reason why the stock may be starting on another long bear phase? I'm not saying it will - but there is a good probability.)


Anonymous said...

Hello Sir,

is that due to lower volume, stock is moving up but volume is lower, I am not saying about OBV.

After mid oct. 09 volume was lower.


Subhankar said...

Good observation, Titu.

Since mid-Oct '09, volumes have gone down significantly. However, on several 'up days', volumes were significantly higher. That is why the OBV has moved up with the stock price (as it should).

But that is not the answer I was looking for.

Vp said...

Hi Subhankar,

I have noticed you havent given stock chart patterns of Large Cap Stocks like ABB, Axis Bank, BHEL, Grasim, Hindalco, HDFC, HDFC Bank, ITC, Maruti, NTPC, ONGC, Reliance, SAIL, Sterlite, Sun Pharma, Tata Power, Tata Motors, TCS & many more.....

Also, there is no mention of stocks like these in your BLOG. It is good to have a contrarian view but how can one ignore bellwethers like these if you are talking about

Subhankar said...

@Titu: Have a look at the long term chart. See the two peaks? There is every possibility of the stock correcting from the second one.

@Vp: You are quite correct in your observation.

I have written about a few large caps like HUL, SBI, Tata Steel, L&T. I've also written about Reliance on Jan 4 '09 - but it wasn't a technical analysis.

Most readers request for small and mid-cap stocks. My endeavour has been to separate the wheat from the chaff among them.

Will try and write a few posts from your large cap list - so stay tuned.

Gaurav said...

What's you call now, given the bull run in the stock. Is it good for any more. I bought it at around 128 long time back, exited at 600, bought again at 700 and sold at 782.

I couldn't buy it in the recent correction but eager to add it again. Please recommend a strategy.

Subhankar said...

Guess its time for another update on this stock, Gaurav.

Please await my post this Wednesday (Dec 8 '10).