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Wednesday, April 14, 2010

Stock Chart Pattern - Gayatri Projects Ltd (An Update)

My previous look at the stock chart pattern of Gayatri Projects was back in June '09 - almost 10 months ago. The stock had just completed a spectacular rise from a low near 40 to a high near 200 after 11 straight upper circuits!

The stock became hugely overbought - as is evident from the slow stochastic and RSI indicators - and entered a corrective phase that took it down below the 20 day EMA. From the technical indicators, I surmised a further correction down to the 140 level where possible support from the 50 day EMA was expected to kick in.

I have mentioned more than once that technical analysis is not a science. Similar chart patterns often do not produce similar outcomes. During bear phases, lower targets get penetrated further. In bull markets upper targets are often overshot.

During shorter time frames technical analysis becomes more of a 'hit and miss' affair, but on longer time frames it can turn out to be almost prophetic. A look at the one year bar chart pattern of Gayatri Projects will help clarify what I mean:-

Gayatri Proj_Apr1310

At the bottom left corner of the chart, note the 11 straight upper circuit days and the subsequent correction below the 20 day EMA. Instead of continuing to correct down to the 50 day EMA, the stock again moved up to the 200 level, before dropping down to seek support from the 50 day EMA. End result? The stock fell to a low of 153 and not to 140.

Now, here comes the 'prophetic' part. This is what I wrote in my earlier blog post:

'Reaching the all-time high any time soon may be a tall order. After the correction runs its course, the stock may hit upside targets of Rs 225/250/320 before facing major resistance. That means a possible 50-100% rise from the current level.'

The closing rate on June 25 '09 was 164. If you had been brave (or lucky) to heed my advice and buy the stock, you would be sitting today on handsome profits exceeding 150%!

The first top, after the correction took support at the 50 day EMA, was at 289 in early Aug '09 - surpassing the first two upper targets. The next top was 317 a month later. A brief consolidation was followed by a rise to 394 in the third week of Oct '09.

The stock ultimately made an intra-day top at 472 in Feb '10 - thereby correcting almost 66% of its huge 94% bear market fall from 696 (in Jan '08) to 42 (in Mar '09). Small and mid-cap stocks take a long time to recover from such massive falls - one of the inherent risks of investing in such stocks. Stupendous returns are often followed by soul-destroying collapses.

The Gayatri Projects stock has been in a sideways consolidation for the past three months, like several other stocks. Probably awaiting a trigger from Q4 results to decide which way to turn. The slow stochastic and RSI are indicating short-term weakness, though the MACD is positive and above the signal line.

Bottomline? The stock chart pattern of Gayatri Projects is in a 'pause' mode just below the 61.8% Fibonacci retracement level of the bear market fall. Existing investors can book partial profits. Fresh investments can be made after a correction, or after the stock clears the 486 level.


kaku said...

hi - you had indicated earlier in 2009 that this stock was somewhat of a hidden gem. Could you please update your analysis... like when would it be a good point for fresh investors to enter.

Subhankar said...

After touching a new high of 503 in May '10, the stock has been in a down trend and has formed a bearish descending triangle pattern.

A break below 370 can take the stock down to 320. Let the correction play out before thinking about entering.

kaku said...

the stock has recently seen a dilution of its stock capital from 15cr to 40cr.

also there were bulk sales to individuals.

so does that change the fundamentals

Subhankar said...

The authorised capital has been increased from 15 to 40 Crores. The actual dilution hasn't happened yet.

If the additional equity is issued at a significant premium, it will improve the balance sheet and enable the company to avail of larger loans to execute bigger projects - which will be good for the long term.

There will be EPS dilution in the short-term, which may partly explain why the stock has been in a down trend for 6 months.