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Wednesday, July 20, 2011

Stock Chart Pattern - Carborundum Universal (An Update)

In the previous update to the analysis of the stock chart pattern of Carborundum Universal, I had observed negative divergences in the technical indicators after the stock had reached a new high of 231 on Jul 27 ‘10. Volumes were massive that day, which some times indicates buying exhaustion.

Accordingly, investors were cautioned about a possible correction down to the 200 day EMA (at 180), or even lower to the support level of 165. The stock did correct, dropping below its 20 day and 50 day EMAs, but found support at the long-term support-resistance level of 204 in end-Aug ‘10. The dip of 12.5% from the top of 231 was a healthy bull market correction.

Let us see how the chart pattern shaped up from the one year bar chart pattern of Carborundum Universal:

Carborundum_Jul2011

The stock bounced up sharply, backed by good volumes, and embarked on a strong rally during Sep and Oct ‘10 – reaching a new high of 279.50 on Nov 1 ‘10. But the RSI and slow stochastic failed to reach new highs (marked by blue arrows) – a warning about a possible correction.

The correction coincided with the ones taking place in the Sensex and Nifty. The stock price dropped to 224 on Nov 29 ‘10 – a 20% correction that underperformed the Sensex – and then went into a sideways consolidation with a downward bias that breached the 200 day EMA on Mar 14 ‘11.

A double-bottom at 217 ended the correction. Note that the stock price spent 12 straight trading days below the long-term moving average – raising the spectre of a bear market. But neither the 20 day EMA, nor the 50 day EMA dropped below the 200 day EMA – keeping the bull market intact.

The end to the correction was confirmed by the positive divergences in the ROC (which made a higher bottom) and slow stochastic (which made a flat bottom), as the stock price made a lower bottom at 217 (marked by blue arrows).

A spectacular 3 months long rally that outperformed the Sensex, culminated in a new high of 320 on Jul 11 ‘11. But the ROC and RSI reached lower tops and the slow stochastic made a flat top (marked again by blue arrows).

The technical indicators have started weakening as the stock has started a sideways consolidation. The MACD is positive, but has crossed below its signal line. The ROC is also positive, but has fallen below its 10 day MA. Both the RSI and slow stochastic have dropped from their overbought zones, and are headed downwards.

A correction down to the rising 50 day EMA is a possibility. The stock is in a bull market, and dips can be used to add. The company is fundamentally strong, investor friendly, with prudent financial management and steady growth. The stock can make an excellent addition to a small investor’s portfolio.

Bottomline? The stock chart pattern of Carborundum Universal is consolidating after a strong rally. Existing holders can book partial profits. New entrants can add on the likely dip.

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