Thursday, October 20, 2011

Stock Chart Pattern - Navneet Publications (An Update)

The previous technical update of the stock chart pattern of Navneet Publications was posted about a year back. The stock had touched a new closing high of 74, but the technical indicators failed to reach new highs.

The negative divergences was an advance warning of a likely correction. The stock was trading at a high TTM P/E of 25.8, which led me to conclude as follows:

‘The stock chart pattern of Navneet Publications is looking a little overbought and ripe for a pullback. Existing holders may decide to book partial profits..’

On hindsight, the timing of my suggestion appears to be a bit fortuitous, as the stock started to correct from the very next day after my post. Let us have a look at the closing chart pattern of Navneet Publications to see how the stock has fared in the past year or so:


The stock’s price formed a head-and-shoulders reversal pattern during the months of Sep, Oct and Nov ‘10. There are two interesting and important points to note. First, the volumes – which spiked during the formation of the left shoulder and the head. During the formation of the right shoulder, volumes did spike up but was quite a bit lower. This is characteristic volume action for a head-and-shoulders pattern.

The second point – though this isn’t a ‘rule’ – is the ‘pullback’ to the ‘neckline’ of the head-and-shoulders pattern immediately following the break down below the ‘neckline’. Such pullbacks provide selling opportunities.

Head-and-shoulders patterns have measuring implications. A stock’s price is expected to fall the same amount below the neckline as the height of the head above the neckline. In this case, the head was at 74 and the neckline at 60, giving a downward target of (60 – 14 =) 46.

However, the stock dropped just below the rising 200 day EMA to 53 in Dec ‘10 before bouncing up above the neckline to 64 in Jan ‘11. Downside targets usually fall short, but this was a big miss – indicating the inherent strength of the stock. The stock eventually dropped to a slightly lower close of 52 in Feb ‘11 but on the bar chart pattern (not shown) it touched a slightly higher bottom.

Note the flat OBV indicator during Jan and Feb ‘11, when the stock price was correcting. The positive divergence hinted at a rally, which is still continuing. Another very interesting point is the behaviour of the 50 day EMA, which merged with the 200 day EMA for a few days in Mar ‘11 but never crossed below it.

Though the stock dropped almost 30% from its peak of 74 to its low of 52, a bear market didn’t get confirmed since the ‘death cross’ failed. The subsequent bullish pattern of higher tops and higher bottoms, and a rising 200 day EMA means that the stock is in a bull market - outperforming the Sensex and Nifty.

However, the bears will remain in the picture as long as the stock fails to move above its previous top of 74. The stock has given zero returns in the past 12 months (except the dividend) but has provided plenty of trading opportunities.

The technical indicators are mildly bullish. The fundamentals remain quite strong with positive cash flows from operations, and steady rather than spectacular growth in top and bottom lines. A good defensive stock for conservative portfolios.

Bottomline? The stock chart pattern of Navneet Publications is in a bull market. The rising OBV indicates accumulation by smart investors. Use dips to buy. Unlike most small-cap stocks, this one trades in decent volumes. However, the price volatility indicates that the stop-loss should not be set too tight.


richfellow said...

Dont u think the business model of navneet is facing stiff competition from ITC?

Subhankar said...

Half of Navneet's sales and profits come from educational publication.

Its stationery business does face competition from ITC, but greater competition from the unorganised sector.