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Wednesday, September 15, 2010

Stock Chart Pattern - Ratnamani Metals and Tubes (An Update)

In my previous analysis of the stock chart pattern of Ratnamani Metals and Tubes back in Dec ‘09, it was observed that the OBV was moving up while the stock was correcting after touching a high of 118 in Sept ‘09. That was an indication of ‘accumulation’. However, the RSI and slow stochastic were indicating bearishness.

On the longer term charts, the stock was struggling to recover after a huge bear market fall from a high of 302 in Jan ‘08 (adjusted for a 5:1 stock split) to a low of 32 in Mar ‘09. Small cap stocks rarely recover from such a large fall of almost 90%. The fundamentals of the company looked good, but I had clearly mentioned that it was a high risk bet that could touch 150 if it cleared the high of 118.

With the Sensex climbing to new highs, very close to its all time high of 21200, it is an appropriate time to check how this small-cap stock has fared. The one year bar chart pattern of Ratnamani Metals and Tubes reveals that things haven’t gone too well:

Ratnamani_Sep1510

The stock moved up to touch an intra-day high of 121 in Jan ‘10 – which was within the 3% ‘whipsaw’ leeway of the Sep ‘09 high of 118. Note how the stock dropped right back to 95. There could not be a better example of the reason why the 3% technical leeway should be used to confirm any breach of a previous top (or bottom).

The stock chart formed a nice cup-and-handle continuation pattern over the next four months and finally broke above the 121 level on decent volumes in Apr ‘10. Note how the OBV remained flat initially and then started to move up when the ‘cup’ was being formed. More sign of accumulation.

After reaching a high of 135, the stock corrected down to 114 and then started a steady climb upwards from Jun-Aug ‘10, using the 20 day EMA as a ramp. It recently touched an intra-day and 52 week high of 148.55 – close enough to the target of 150 mentioned in my earlier post.

Note that while the Sensex has been moving up after breaking out above a year long trading range, mid-cap and small-cap stocks have been facing selling pressure. No wonder, the Ratnamani Metals stock price has corrected sharply down to the 20 day EMA. At its recent high of 148.55, the stock retraced only 43% of its bear market fall.

The 50% Fibonacci retracement level of the bear market fall is at 167. That hurdle needs to be crossed for the stock to re-enter a bull market – even though it is trading above the three rising EMAs. The slow stochastic has dropped below the 50% level and the RSI is about to follow suit. The stock may correct some more before it resumes its up move.

Fundamentally, things weren’t so good last year. Sales dropped by 10% in FY ‘10 though profits were maintained. Cash flow from operation turned negative. Debt burden has increased but remains within manageable limits. Promoter holding is now 57%. It was 60% when I looked at the stock in Dec ‘09. FII holding has gone up from 1% to 5%. The stock is available at a P/E of less than 8, and can be looked at on dips for accumulation.

Bottomline? The stock chart pattern of Ratnamani Metals and Tubes almost attained the first target of 150. The next target is 180. The stock isn’t my favourite in the pipes and tubes space, and remains a high risk bet.

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