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Wednesday, September 22, 2010

Stock Chart Pattern – Diamines and Chemicals

It is no coincidence that the stock chart pattern of Diamines and Chemicals is the subject of this post. In a stock market trading near all-time highs and starved of new stock ideas, a good stock picker like Ashish Chugh can always manage to pull out a few rabbits from his hat.

Invariably, his suggested stock spikes up in value on a high volume surge almost as soon as the name is mentioned. Diamines and Chemicals has been around for quite a long while – incorporated in 1976, and production started in 1982.

It is the sole manufacturer in India of Ethylene Amines for over two decades and Piperazine since 2000. Ashish Chugh has covered most of the fundamentals in this interview. I would like to add my favourite metric – cash flow from operations, which was positive in 4 of the past 5 years.

The cash management has been prudent and the Debt/Equity ratio is now less than 1. Even with the spike in price today, the stock is trading at a P/E of 5.06. That gives an earnings yield (E/P) of almost 20% – more than double the current bank fixed deposit rates, leaving adequate ‘Margin of Safety’.

What don’t I like about this stock? In spite of its monopoly status, which almost ensures high margins, the company’s performance has been uneven. Sales were flat in FY ‘06 and FY ‘07; dipped by 14% in FY ‘08; then rose by 62% in FY ‘09 and 50% in FY ‘10. At the end of it all, the company has still not reached the Rs 50 Crores mark! Obviously, it is the only fish in a very tiny pond.

Let us look at the 3 years weekly bar chart pattern of Diamines and Chemicals:


For a small-cap stock, it has been a pretty remarkable recovery. From a peak of 78 on Jan 4 ‘08, the price dropped a whopping 78% to a low of 17 on Feb 6 ‘09. The stock had a sharp ‘V’ shaped recovery that retraced 92.5% of the bear market fall, when it touched a high of 73.45 on Jan 8 ‘10.

A good correction took the stock down to the 50 week EMA (equivalent to the 200 day EMA on a daily chart) at 47, where it received strong support. The correction retraced 46% of the rise from the low of 17 to the high of 73.45 – just short of the 50% Fibonacci retracement level.

The stock then jumped to a new high of 80 on Apr 16 ‘10, dropped down to the 50 week EMA again on May 21 ‘10 and has since been consolidating sideways between 50 and 70, till today’s break out. The previous high of 80 is the next target. If that is taken out, and there is every chance that it will be, then the stock will be in ‘blue sky’ territory (which means uncharted, with no known resistances).

The technical indicators are bullish. The RSI has moved up to the edge of the overbought zone. The slow stochastic is about to enter its overbought zone. The MACD is positive and just above the signal line. Expect a test of the 80 level soon, followed by a likely dip down to the 20 week or 50 week EMAs. That may provide better entry opportunities.

Bottomline? The stock chart pattern of Diamines and Chemicals is 10% below its all-time high. One needs to be cautious rather than euphoric when a stock is close to its all-time high. Those who got in earlier at lower prices tend to book profits at higher levels. Use the dip to enter – but remember to maintain a strict stop-loss.

Related Post

What exactly is the Margin of Safety?

1 comment:

Subhankar said...

Diamines and Chemicals has announced a dividend of Rs 4.50 per share and proposed a bonus issue in the ratio of 1:2.