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Wednesday, January 12, 2011

Stock Chart Pattern - Sintex Industries (An Update)

In the comments section of the previous update to the stock chart pattern of Sintex Industries, a link to a Business Standard article dated Dec 31 ‘10 was provided. The article mentioned that valuations were attractive, a recent acquisition was likely to be top-line and bottom-line accretive, the company’s businesses were growing, the correction in the stock price had been undue, and the stock had a price target of 252.

Well, the valuations have become even more attractive as the stock price continues its correction from the Nov ‘10 top of 237 (adjusted for the 2:1 split in Oct ‘10). The face value of the stock is now Re 1 – and that could be one of the reasons for the ‘undue’ correction. The number of shares in the demat accounts of investors have doubled – thanks to the split. As often happens after bonus issues and splits, the additional liquidity leads to selling. In this case, the correction in the stock happened to coincide with the corrections in the BSE Midcap index, and the Sensex.

What should investors do? Let us look for clues in the one year bar chart pattern of Sintex Industries:

Sintex_Jan1211

The stock reached a split-adjusted high of 168 in Apr ‘10 (equivalent to 336 for the then Rs 2 face-value stock), and then corrected down to 131 where it received support from the 200 day EMA. The subsequent rally touched a new high of 229 in Oct ‘10 on a volume surge prior to the split.

Post-split, the stock resumed its rally and touched another new high of 237 in Nov ‘10 (which was still well below the Jan ‘08 split-adjusted high of 308). Note that while the stock price reached a new high, the MACD, ROC and RSI made lower tops (marked by blue arrows) – negative divergences that gave a warning about an impending correction. The slow stochastic touched a higher top, but was overwhelmed 3 to 1 by the other indicators. This is one reason for looking at several indicators in technical analysis.

The stock price broke below the 200 day EMA and the 168 level on Dec 22 ‘10 on a volume spurt, but managed to close above 168. A brief rally found resistance from the falling 100 day EMA, and this time the stock first fell below the long-term moving average before closing below 168 two days in a row. Today, the stock bounced up to close exactly at 168.

The technical indicators are all bearish, and the trend continues to be down. The 20 day EMA is about to drop below the 200 day EMA. The 50 day EMA is touching the 100 day EMA, and both are falling. The MACD is negative and below the signal line. The ROC is also negative and below its 10 day MA. The RSI twice failed to move above its 50% level and has almost dropped to its oversold zone. The slow stochastic has entered the oversold zone.

The only silver lining for the bulls is the positive divergences in all four technical indicators, which have made higher bottoms while the stock price made a lower bottom (marked by blue arrows). That could lead to another rally, but will it be strong enough to revive the bull market?

Technically, the answer is: no. The 33% correction from the recent high of 237 to yesterday’s low of 158 has pushed the stock into a bear market. The bearish pattern of lower tops and lower bottoms is in tact. Higher volumes on down days and lower volumes on subsequent up days indicate more sellers than buyers. The final confirmation of the bear market – the 50 day EMA falling below the 200 day EMA is still awaited, but seems imminent.

What about the fundamentals? Are they really attractive? Not quite. The debt/equity ratio is more than 1; profits took a hit and cash flows from operating activities turned negative last year. The market has been unkind to companies with large debt on its books. Things may improve in the next financial year, but we need to wait and see.

Bottomline? The stock chart pattern of Sintex Industries is an example of how a stock that appears to be fundamentally investment-worthy is to be avoided for technical reasons. Sell.

2 comments:

Abhishek Basumallick said...

Sintex has been free cash flow negative both on a consolidated and standalone basis for a long time now. It's operating cash flow turned -ve last year. The concern on high debt is something I also have. But again, they have been high debtors for the last 10 years and have still managed to perform reasonably well.
The latest fall is probably because of institutional selling by some mutual funds, as reported by ET. I think the near future is tough for the company as it moves from a plastics company to more of a construction company. But the management is good so I am keen to see how they handle this.

What do you think the support levels for Sintex would be?

Regards,
Abhishek
http://valueinvstr.blogspot.com

Subhankar said...

130-148 zone may provide support, Abhishek. If that support zone is broken, the stock can fall into double-digits.

The company appears to be di'worse'ifying into unrelated areas in search of growth.