Wednesday, March 9, 2011

Stock Chart Pattern - JK Lakshmi Cement (An Update)

The prior update to the analysis of the stock chart pattern of JK Lakshmi Cement was posted 10 months back. The stock had touched a post-split high of 85 in Jan ‘10 followed by a quick drop to the support level of 64. The upward bounce from the support reached a high of 81 in Mar ‘10. Failure to test the previous high was the first warning of a trend change.

It is quite interesting to look back after some time to check what had been advised earlier:

‘…all may not be well with the cement sector. If you hold the stock, get out at the earliest. A drop below 64 can take the stock to 58. On a break below 58, it can go to 48 and 34. New entrants should wait for the correction to play out.’

The one year bar chart pattern of JK Lakshmi Cement below shows that my advice was spot-on:

JKLakshmi Cement_Mar0911

Though the stock was seeking support from the 64 level back in May ‘10, it had already slipped below its 200 day EMA, and the technical indicators were very bearish. That is why I had advised investors to sell. By the 3rd week of May ‘10, the stock dropped into the support zone between 58-64 and traded sideways till end-Jun ‘10. The ‘death cross’ (marked by the blue oval) on Jun 24 ‘10 confirmed a bear market.

Note that while the stock was drifting down below the 200 day EMA during May-Jun ‘10, all the four technical indicators were moving up, making higher tops and higher bottoms. The positive divergences were signalling a possible rally.

On Jul 1 ‘10, the stock had a sharp move above the support zone and the entangled 50 day and 200 day EMAs – but soon drifted down to the 64 level. On Jul 19 ‘10, another sharp up move on a volume spike took the stock above its entangled 50 day and 200 day EMAs – but it turned out to be a well-laid trap for the bulls.

This time, the stock swiftly dropped below the 64 level and reached the lower edge of the support zone at 58. By end-Jul ‘10, the 50 day EMA finally dropped below the 200 day EMA though it remained close to the long-term average till Nov ‘10, as the stock price oscillated around the 64 level.

On Nov 18 ‘10, the stock closed below the 58 level, and after a few days of struggle to hang on, dropped swiftly down to the next lower target of 48. A sharp upward bounce found resistance from the 58 level – clearly demonstrating how broken support levels turn into resistance levels.

A brief rally in Dec ‘10 took the stock above its falling 50 day EMA and there were two closes above the 58 level in early Jan ‘11. But the stock price failed to test the falling 200 day EMA, and the subsequent down move broke the support of the 48 level and reached a new low of 40.50 on Feb 11 ‘11.

Not surprisingly, the upward bounce found resistance from the 48 level. The stock is likely to test its recent low and move down further to the next target of 34. Note that though the stock made a new low, the ROC reached a higher low and the RSI didn’t move lower. The positive divergences can lead to a rally that may take the stock price above the 48 level.

But bulls shouldn’t get too excited. The technical indicators are hinting at only a mild rally. The MACD is above the signal line, and both are moving up – but both remain in negative territory. The ROC is also negative, and below its 10 day MA. The RSI failed to reach its overbought zone and is dropping to the 50% level. The slow stochastic touched its overbought zone, only to turn back and fall below the 50% level.

Bottomline? The stock chart pattern of JK Lakshmi Cement doesn’t appear to have found a bottom yet. Q3 results were disastrous – a 10% drop in top line on a YoY basis but a whopping 90% shrinkage of the bottom line. Avoid for now, but keep it on the watch list.

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