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Wednesday, January 26, 2011

Stock Chart Pattern - Sanghvi Movers (An Update)

In my previous update of the stock chart pattern of Sanghvi Movers back in Apr ‘10, I had mentioned about some bearish dark clouds on the horizon after the stock had met its upside target of 260 in Jan ‘10. Some of the observations made in my previous update may be worth repeating here:

‘Note that as the stock rose from 180 to 272 during Dec '09 - Jan '10, making bullish higher tops and bottoms, the slow stochastic and MACD made lower tops, and the RSI remained flat. All three indicators were showing negative divergence.

No wonder a correction has followed. The stock made lower tops and a flat bottom at 205 during the Jan '10 - Mar '10 period. That is a bearish 'descending triangle' from which the likely break is downwards. If it does break down, it may test the previous low of 138.’

Some interesting patterns have formed in the Sanghvi Movers chart in the past 10 months, which has pushed this favourite stock of the previous bull market into a bear market:

Sanghvi Movers_Jan2611

Note the negative divergences in the technical indicators during the Dec ‘09 – Jan ‘10 period. The stock price rapidly moved up to touch a high of 272 on Jan 15 ‘10 while the MACD, ROC, slow stochastic moved lower and the RSI remained flat (marked by blue arrows). A sharp decline to 205 was followed by a mild upward bounce and a test of support from the 205 level and the rising 100 day EMA.

A good up move in Mar ‘10 reached a lower top of 240, followed by another drop to the 205 level – forming a bearish descending triangle pattern. Triangles are notorious for being unreliable, but descending triangles usually indicate a downward break with measuring implications. In this case, the down side target was 138.

Instead of breaking downwards, the stock gave an upward break out! The high volume support for such a break out was lacking. The break out turned out to be ‘false’ and became an ‘end run’. The stock dropped below the 200 day EMA to 166 on Jun 7 ‘10. A sharp rally moved up above all four EMAs, but topped out at 210. This time, the correction led to a ‘death cross’ (50 day EMA crossing below the 200 day EMA), confirming a bear market.

The stock began a prolonged consolidation within another descending triangle, from which it broke down earlier this month. Though it is trading above the earlier downside target of 138, the break down from the second descending triangle has a lower target of 116. (210 – 163 = 47; 163 – 47 = 116.)

Is the price drop a result of any weakness in the fundamentals? Apparently not. Cash flows from operations are positive. Turnover and profits took a hit in year-ending Mar ‘10 – but it did so for many companies. Debt:Equity ratio is a little more than 1, but for a capital intensive business, that isn’t so unusual. Promoter holding is 45% and FII holding is almost 23%. Q2 results were better both on YoY and QoQ basis. The company has been paying regular dividends for the past 7 years.

Put another feather on the cap of technical analysis! A stock that seems to be doing well fundamentally has lost more than 40% from its peak in one year and is in a bear market. The descending triangle that I had spotted back in Apr ‘10 gave a good indication of the bearishness to follow.

Bottomline? The stock chart pattern of Sanghvi Movers is facing technical headwinds though fundamentals appear to be strong. Contrarian investing is all about picking up stocks that no one wants to buy – provided you are convinced about the company’s business model and integrity. Await Q3 and Q4 results before entering. Bravehearts can start accumulating on a drop below 138.

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