The stock chart pattern of Cranes Software brings to mind a few stock market cliches:
1. Never try to catch a falling knife - you are supposed to wait for the knife to hit the table first, where it is likely to vibrate for a while; then it is safer to catch it. Question is: do you want to? (In the case of Cranes Software, some one seems to have removed the table which was covering a bottomless hole!)
2. Just because a stock is trading cheap, doesn't mean it can't trade cheaper.
3. Never average down in price; average up instead, because you don't know how low it can go.
The bar chart pattern of the Cranes Software stock from Mar '09 till date shows that ambition and the pursuit of growth needs to be tempered with financial prudence and patience - otherwise it may lead to annihilation:-
When I wrote about the stock back in July '09, it had made a double-bottom - 35 in Mar '09 and 34 in Jul '09 - and tried to move up. The resistance from the 50 day EMA proved too strong and the stock moved down again to 33.5 in Aug '09.
An up move on good volumes took the stock above the 50 day EMA, but a double-top at 48 proved to be its last hurrah. The stock dropped below the 50 day EMA in Oct '09 and has stayed below it till date.
A long-term support-resistance line has been drawn at 33. That level supported the stock's fall four times (marked by up arrows). This provides a classic example about support-resistance levels - which act more like a thin membrane than a spring. Each test of the support (or resistance) weakens it.
After three or four tests, the support (or resistance) tends to break. Thereafter, the support usually turns into a resistance, and a resistance turns into a support. Note that after the convincing break below the support of 33 in Dec '09, the level provided resistance in Jan '10 (marked by the down arrow), and then the bottom fell out of the stock.
The MACD has remained negative since Oct '09. The RSI and slow stochastic have once again entered oversold zones.
For those who did not read my earlier analysis in July '09, the concluding paragraph is quoted below:
"The stock chart pattern of Cranes Software is a reminder of what can happen if the pursuit of growth by acquisition leads to too much debt. Even good cash flows from operations may not be enough to survive. This is not for the faint-of-heart. Intrepid investors should maintain strict stop loss at Rs 33."
Technical analysis is not perfect. But if you don't know the basics, it can hurt you where it hurts the most in the stock market. Your wallet!
Bottomline? The stock chart pattern of Cranes Software shows that its glory days during the previous bull market are long gone, and now it is just a struggle for survival. If you own the stock, get out now. If you think it can't go lower, think again. It is game, set and match for the bears.
(Question for readers: what do you think the volume action may indicate?)