Wednesday, October 6, 2010

Stock Chart Pattern - Navneet Publications (An Update)

The chart pattern of Navneet Publications had risen from a low of 14 in Oct ‘08 to a high of 45 in Sep ‘09 (adjusted for 3:2 bonus), and then entered a sideways consolidation in a ‘flag’ pattern formation.

I had written a technical analysis of the stock back in Dec ‘09 at the request of reader Ruy. The stock had closed at 38.90 and I had made these comments:

‘Such a pattern is usually a continuation formation which should end with an upward break out…bulls can take heart from the OBV which has been gradually rising during the consolidation phase…The stock chart pattern of Navneet Publications is indicating accumulation by the smart money. Investors can buy in small lots with a stop-loss at 32. On an upward break out, the stock can move up to 70 in the medium term.’ 

Yesterday, reader Narinder left a comment that the target of 70 had been achieved, and requested a technical update of the stock. Let us look at the 14 months bar chart pattern of Navneet Publications:

Navneet_Oct0610

Note the ‘flag’ pattern following the 3:2 bonus adjustment (marked by the bell). While the stock made lower tops and higher bottoms as it consolidated sideways within the pattern, the OBV kept moving up – indicating accumulation.

The expected upward break out happened shortly after I wrote the earlier post, followed by a pullback that received support at the rising 20 day EMA before it could drop to the upper (downward-sloping) trend line.

A sharp spike on strong volumes took the stock to a high of 54.85 in Jan ‘10. Note that both the RSI and slow stochastic made lower tops (marked with small downward-sloping arrows). The negative divergences preceded an 8 months long sideways consolidation in a rectangular pattern between 45 and 57.

Such long consolidations usually end with a strong break out in the direction that the stock was moving prior to entering the consolidation pattern. In this case, upward. Note that the OBV was steadily moving up during the 8 months of sideways consolidation, indicating accumulation.

The minimum upward target of the rectangular consolidation between 45 and 57 is the width of the rectangle (57 – 45 =) 12 added to the upper edge of the rectangle; i.e. 57 + 12 = 69.

The rectangular consolidation hadn’t even formed back in Dec ‘09, when I had set the upward target at 70. How did I do it? No magic or prediction capability. Just knowledge and experience of technical analysis.

To calculate upward target, the ‘pole’ of a ‘flag’ pattern is added to the break out point. In this case, the ‘pole’ was the rise from the low of 14 to the high of 45, or 31 points. Add 31 to 38.90 (which was the closing rate on the day I wrote the earlier post) and you get 69.90 – rounded off to 70.

I didn’t know that 38.90 was going to be the break out point – so the target was an educated guess. In technical analysis, we work with approximate, and not exact, levels. 

A couple of interesting points to note. The upward break out from the rectangular pattern in Aug ‘10 was on a strong volume spike, followed immediately by a pullback down within the rectangle range. This happens often. The strategy to be followed for such situations is to buy a small quantity on the break out, and then add more – either on the pullback, or on the next dip.

Today’s (Oct 6 ‘10) intra-day high was 74.80 and the close was 74.10. Our minimum targets have been met. What next? Note the negative divergences in the MACD, RSI and slow stochastic – all three have made lower tops as the stock touched a new all-time high.

A correction down to the 20 day EMA is very much on the cards. The stock is in ‘blue sky’ territory – which means there are no known resistances. However, the TTM P/E of 25.8 leaves no Margin of Safety.

Bottomline? The stock chart pattern of Navneet Publications is looking a little overbought and ripe for a pullback. Existing holders may decide to book partial profits, or hold with an 8% trailing stop-loss. Prudence demands that fresh entry should await Q2 results.

4 comments:

kaku said...

this stock has had almost 20% drop since last high and its q2 profit is showing an increase from 2 cr to 4.7 cr

its currently at 60. would this be a good dip to enter the stock

Subhankar said...

Good observation, kaku.

After the expected dip, the stock seems to have found a bottom at 60. Though the stock may dip a bit further, one can start accumulating slowly.

Titu said...

Hello Sir,

is Navneet Publication chart forming a cup and handle pattern?
if yes, can we sell at 65/- just to buy it again at lower price.

Thanking you in advance...

-titu

Subhankar said...

The 'cup' has formed, Titu, but there is no sign of the 'handle' yet - so selling at this stage will be speculation.

A handle may not form, and even if it does, it may not drop more than 4-5 points. Selling and re-buying for a 5 point gain doesn't make much sense - unless you are trading in massive quantities.