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Thursday, November 4, 2010

Stock Chart Pattern - Thermax Ltd. (An Update)

The stock chart pattern of Thermax was last analysed at the beginning of the year when it was struggling to go past 650. That was the 61.8% Fibonacci retracement level of its massive bear market fall from a peak of 968 in Oct ‘07 to a trough of 151 in Dec ‘08.

The spectacular 500 points rise from the low got the stock back into a bull market but the technical indicators were showing negative divergences. I had advised existing holders to book partial profits, and new entrants to wait for a likely correction to enter – as the 650-700 zone was a long-term support/resistance level.

Let us take a look at the one year bar chart pattern of Thermax Ltd to find out if my advice proved useful for investors:

Thermax_Nov0410

As it turns out, it did – for those who heeded it. Shortly after I posted the previous analysis, the stock broke out above the 650 level on strong volumes – only to face overhead resistance from the 700 level. On Jan 21 ‘10, the stock touched a new high of 745, but it turned out to be a high volume ‘reversal day’ (higher high, lower close).

The month-long correction that followed took the stock below both its 20 day and 50 day EMAs. After a drop of nearly 25% – from 745 to 560 – the stock found support at its previous low, formed another high-volume ‘reversal day’ pattern (lower low, higher close) and moved up sharply to touch the 700 level once more.

The entire month of Mar ‘10 was spent in consolidating within the 650-700 zone. In Apr ‘10, the stock managed to move above the 700 level, which turned into a support level. After reaching a new high of 750 on Apr 23 ‘10, the stock again corrected down to the 650 level and spent May ‘10 consolidating within the 650-700 zone.

In Jun ‘10, the stock finally moved above the 700 level, and this time there was no turning back. The rising 50 day EMA provided good support to the upward journey. A new high of 850 was touched on Jul 26 ‘10 – which again was a ‘reversal day’ but on tepid volumes.

The next three months were spent in another sideways consolidation between 750 and 850. A high-volume break out on Oct 28 ‘10 took the stock above the consolidation range, and the subsequent sharp rally ended the year with a high of 927 and a close bang on the 900 level.

Both fundamentally and technically, the stock is looking overbought and ripe for a correction. On a trailing twelve month (TTM) basis, the stock is trading at a high P/E of 54.6. The loss in the Mar ‘10 quarter is partly responsible for the lower TTM EPS. The excellent Q2 ‘10 results are the probable cause of the recent price spike.

The MFI, RSI and slow stochastic have all entered their overbought zones. The MACD has moved sharply above the signal line. While technical indicators can remain overbought for a while, a correction or consolidation is likely to follow soon.

Bottomline? The stock chart pattern of Thermax Ltd exemplifies the benefit of choosing a fundamentally strong stock and patiently holding it for the long-term. The ability to discern and interpret technical analysis signals enable good entry/exit points for optimising returns. The stock has been a six-bagger from its Dec ‘08 low. Existing holders can book partial profits, if they wish. New entrants should wait for a 15-20% correction.

6 comments:

alphabet1 said...

You dont short stocks like Thermax, Titan - find another.

Subhankar said...

Small investors should refrain from shorting any stock - not just Thermax or Titan.

Even good stocks get overvalued and face corrections. Partial profit booking at peaks allow re-entry at lower levels to optimise returns.

Titu said...

Hello Sir,

Today Thermax is at 705/- corrected 24% from top(52 week high), deep below all 3EMA, 200 EMA is at 764, is it a buy?


-titu

Subhankar said...

@Titu: Remember the old saying - Never try to catch a falling knife. Let it hit the table first, where it usually vibrates for a while. Then grab it.

Titu said...

Hello Sir,

From few days, thermax is close to 500/- I think knife has follen and now vibrating (?), is it a buy now? or should I wait for some time?

-titu

Subhankar said...

The stock is deep in a bear market - making lower tops and lower bottoms.
Till that pattern is reversed, it will not become a 'buy'.

Remember that one can't catch the exact tops or bottoms - except through sheer good luck. So you have to decide when to enter. Looks like there may be more pain.