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Wednesday, December 8, 2010

Stock Chart Pattern - Cummins India (An Update)

When I wrote an update about the stock chart pattern of Cummins India back in Feb ‘10, the stock was correcting from a double-top at around the 485 level after a year long bull rally from a low of 150. In the 3 year chart also, the stock appeared to be forming a long-term bearish double-top. It seemed like a good opportunity to book partial profits, since the stock had more than tripled in value within a year.

Hope investors did not book out completely! The stock has performed remarkably well in the interim and has multiplied more than 5 times since its Mar ‘09 low, becoming one of the shining stars of the current bull market. What should investors be doing now? For the answer, let us look at the one year closing chart pattern of Cummins India:

Cummins_Dec0710

The stock price rose steadily from the date I wrote my previous post, alternately taking support from the rising 20 day and 50 day EMAs. Sharp up moves on volume spurts were followed by periods of sideways consolidation. The pattern of higher tops and higher bottoms remained unbroken – a sign of a stock in a strong bull market.

After closing at an all-time high of 803 on Nov 1 ‘10, the stock has entered another period of sideways consolidation during which it has tested support from the rising 50 day EMA. But there have been three technically significant differences this time around that are hinting at a slightly deeper correction.

Through the past 12 months, the stock closed at a new highs after bouncing up from the 50 day EMA. This time, it bounced up but closed at a slightly lower level of 797 on Nov 30 ‘10. It has been sliding down since then.

A bigger concern is the negative divergences in all four technical indicators. Note that when the stock closed at an all-time high of 803, all four indicators made lower tops (marked by blue arrows).

Subsequently, the stock tested the previous high but stopped short at 797 – forming a possible bearish double-top pattern. The double-top won’t be confirmed unless the stock price falls below the recent low of 756 (which is the ‘valley’ between the two tops).

The MACD is positive but has slipped below its signal line. The ROC has entered negative zone and about to move below its 10 day MA. The RSI failed to remain above its 50% level. The slow stochastic has dropped down from the overbought zone. All four are signalling short-term bearishness.

There are a couple of bullish counter arguments as well – just to keep matters interesting. The recent bottom of 756 was higher than the low of 725 touched in Oct ‘10. A higher bottom and a flat top at around 800 forms a bullish ascending triangle pattern, from which the likely break out will be upwards, with a target of about 850.

Also, the stock is trading well above its rising 100 day and 200 day EMAs, which is a clear sign of a bull market. Three bearish signs against two bullish ones should tip the scale in favour of the bears in the near term. The down side target from the possible double-top is around 715, which is close to the 100 day EMA. An upward bounce from the 100 day EMA or even the 50 day EMA, on decent volumes, can be used to add.

Bottomline? The stock chart pattern of Cummins India is in a strong bull market, but facing temporary technical headwinds. Q2 results have been excellent and fundamentally the stock is a good portfolio choice. Existing holders may take some profits home, or hold on. New entrants should await a bigger correction, as the stock has already run up substantially.

1 comment:

Subhankar said...

Cummins is currently trading on an ex-bonus (2:5) basis.