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Wednesday, May 12, 2010

Stock Chart Pattern - JK Lakshmi Cement (An Update)

My previous analysis of the stock chart pattern of JK Lakshmi Cement was back in July '09. In Dec '09, the stock was split in a 1:2 ratio. So price levels discussed earlier needs to be divided by 2 for comparison with the current chart.

The stock chart had made a nice rounding bottom bullish pattern and gained an impressive 230% in 3 months from a low of 17.50 (then 35) in Mar '09 to 58 (then 116) in Jun '09. The stock was in the midst of a sideways consolidation, with contradictory signals emanating from the technical indicators.

The cement sector is not my favourite - a typical cyclical commodity sector with too many players, leading to low margins. What I liked about JK Lakshmi Cement was its strong balance sheet and commitment towards cost reduction through backward integration. I had suggested that investors could buy the stock on a break-out above 58 (then 116).

Let us take a look at the 1 year bar chart pattern of JK Lakshmi Cement to find out how the stock has fared in the last 10 months:

JKLakshmi Cement_May1210

The sideways consolidation in Jun-Jul '09 lasted about 6 weeks followed by a high volume break-out that took the stock to 64. Thereafter, the stock consolidated sideways again, with the 64 level providing good support. Occasional upward spikes on high volumes gradually took the stock higher till it hit 74 on Oct 1 '09.

A three months long consolidation followed, during which the stock fell below the 64 level. That became a resistance level for a month, till the stock moved up again. Following the stock split, there was a sharp up move on good volumes and the stock hit a high of 85 on Jan 19 '10 before running out of breath.

Note that the initial sharp gain of 230% (17.50 to 58) took only 3 months. The next leg, from 58 to 85 - a gain of 46.5% - took 7 months. Overall, the stock gained 385% from its Mar '09 low -  outperforming the Sensex by a big margin.

The correction from Jan '10 coincided with the overall Sensex correction, but as is often the case with small-cap stocks, it started to underperform the Sensex on the way down. After dropping quickly to 63, it bounced up again but failed to test the previous top.

A sideways consolidation on diminishing volumes continued for 3 months. The stock eventually broke down below the consolidation zone and is now desperately seeking support from the long-term support-resistance level of 64.

The chart pattern shows several notable examples of technical analysis theory. The first one concerns break-outs and break-downs from consolidation zones. Break-outs require high volume support. Break-downs do not.

Next, a consolidation pattern is usually a continuation pattern. That means the trend before entering the consolidation pattern continues. From Jun '09 till Dec '09, all the consolidation patterns ended with an upward break-out on good volumes.

The trend before the consolidation pattern from Feb-Apr '10 was sharply downwards. The break-down from the pattern was therefore logical.

Third, and this is important for investors, bull phases tend to last a lot longer than bear phases. Note that the time taken for the stock to move up from 64 to 85 was almost 6 months (Jul 21 '09 to Jan 19 '10). All the gains got wiped out in the drop from 85 to 63 in just 8 trading sessions.

Such a sharp correction is usually followed by an equally sharp pullback, that provides a good selling opportunity. Very few investors can pick the exact tops or bottoms.

All the technical indicators have turned extremely bearish. The MACD is falling in negative territory. Both the RSI and slow stochastic are deep inside their oversold zones. The stock is below its 200 day EMA (currently at 67 - not shown in chart).

Bottomline? The stock chart pattern of JK Lakshmi Cement shows that all may not be well with the cement sector. If you hold the stock, get out at the earliest. A drop below 64 can take the stock to 58. On a break below 58, it can go to 48 and 34. New entrants should wait for the correction to play out.


asif said...

jk lakshmi has a p/e of 4.5
market cap 796
sales 1400
dont u think it is attractive

Subhankar said...

The stock is fundamentally attractive, Asif. That is why I wrote about it in July '09 and recommended a 'buy'.

But it has turned weak technically and is poised at an important support at 64. If it breaks down below the support, it can go a lot lower. If the support holds, it is likely to go back into the consolidation zone.

The downside risk appears greater at this stage, with the cement sector not doing great.

Mitran said...

if that is the case, we can SIP on every declines. i am holding 5% of my portfolio.

Subhankar said...

Averaging down is never a good idea, because one never knows how low the stock can fall to.

A fundamentally good stock can be technically weak if the sector as a whole is in a down cycle.