More than a year ago, I had analysed the stock chart pattern of Diamines and Chemicals, and had commented as follows:
‘The previous high of 80 is the next target. If that is taken out, and there is every chance that it will be, then the stock will be in ‘blue sky’ territory (which means uncharted, with no known resistances).’
The small-cap company issued bonus shares in the ratio of 1:2 in Jul ‘11, so the price levels mentioned in the previous post need to be divided by 1.5 to adjust for the bonus. The previous high of 80 (touched in Apr ‘10) has become 53.33 on the bonus-adjusted 2 years bar chart pattern:
Immediately after I wrote the post on Diamines and Chemicals in Sep 22 ‘10, the stock price surged past its previous high of 53.33 on a huge volume spurt to touch 64 on Sep 27 ‘10. But it turned out to be a ‘reversal day’, and the stock went into a sharp correction that received support from the 50 day EMA. An equally sharp bounce failed to get past the new high of 64.
The stock went into a sideways consolidation range during Nov and Dec ‘10, receiving frequent support from the 50 day EMA before breaking down below the 200 day EMA in Jan ‘11. After consolidating in a rectangular band between 44 and 52 for 4 months, during which all three EMAs became bunched together (signalling a sharp move), the stock price had an upward gap on May 17 ‘11 on good volumes.
The gap was partly filled on May 23 ‘11 before the stock embarked on the next leg of the rally that touched another new high of 87 on Jul 19 ‘11. But once again, the new high occurred on a ‘reversal day’, and the stock corrected by nearly 30% following the 1:2 bonus (marked by the light blue bell). Note that all four technical indicators reached lower tops as the stock touched a new high. The negative divergences gave advance warning of the correction.
The stock has been consolidating sideways for the past two months. The technical indicators are showing bullish signs, and the 20 day and 50 day EMAs have become entangled. The stock seems ready to make another up move.
The fundamentals are improving, with significant growth in top and bottom lines in year-ending Mar ‘11. Q1 results were much better on a YoY basis, and also showed growth on a QoQ basis. Most impressive is the fact that this small-cap stock has more than doubled in the past 2 years even as the Sensex has given negative returns.
Bottomline? The stock chart pattern of Diamines and Chemicals is in a strong bull market as characterised by higher tops and higher bottoms, and a rising 200 day EMA. Use dips to accumulate, but don’t forget to maintain a suitable stop-loss. Small-cap stocks can swing wildly on low trading volumes. That is what makes them risky.