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Wednesday, November 30, 2011

Stock Chart Pattern - Thermax Ltd. (An Update)

A little more than a year back, I had written a technical analysis of the stock chart pattern of Thermax Ltd. The stock had closed at 900 after touching an intra-day high of 927 (a little below its Oct ‘07 top of 968).

The technical indicators were looking quite overbought. The stock was trading at a TTM P/E of more than 50. A correction had looked imminent, and I had suggested that existing holders could book partial profits. Fundamentally strong stocks can get overpriced due to prevailing market sentiments. One of my concluding comments is worth repeating:

“The ability to discern and interpret technical analysis signals enable good entry/exit points for optimising returns.”

Going through reader comments on the earlier post is quite interesting, and provides some insights into the minds of small investors (despite the very small sample size). Buying and selling stocks is not as simple as opening a demat account and giving instructions to your broker. It requires a fair amount of skill if you want to get it right – and the one year bar chart pattern of Thermax Ltd. is a good example of that:


(The vertical line in Nov ‘10 indicates the day I had written my previous post on Thermax.)

I had no clue that the stock will start falling from the very next day after I wrote the earlier post, but if you note the state of the technical indicators, you will see that all four were looking overbought. The MACD was positive and well above its signal line. The ROC was also positive and well above its 10 day MA. Both the RSI and the slow stochastic were well inside their overbought zones. The technical set-up was of a ‘perfect storm’.

What one doesn’t know in advance is the extent of the subsequent correction. It could be a 10-15% correction, or it could lead to a change of trend and a huge fall. A trend change doesn’t occur over a couple of days. Typically, some sort of a reversal pattern will get formed over a few weeks or months. In the chart above, the stock formed a rare triple-top reversal pattern over two months – touching 927 on Nov 4 ‘10, 913 on Nov 25 ‘10 and 907 on Jan 4 ‘11.

What should have been the strategy of an investor who booked partial profits on Nov 5 ‘10 at say, Rs 900? The zone between 650 and 700 had acted as a support-resistance zone on the way up. So, it should have acted as a support-resistance zone on the way down. Did it?

Note that the stock fell right through the zone - after hesitating a bit during late Jan ‘11 and early Feb ‘11 – to a low of 577 on Feb 10 ‘11. The ‘death cross’ of the 50 day EMA below the 200 day EMA (marked by the light blue oval) confirmed a bear market. The technical indicators were looking oversold, but they can remain oversold for long periods some times. What happened next is interesting. The stock rose to the 650 level, faced resistance, and dropped to a new low of 543 on Feb 28 ‘11, but all four technical indicators touched higher bottoms.

The positive divergences gave a short-term buy signal. Why short-term? Because the stock was in a bear market, and counter-trend rallies are short and swift before they attract selling pressure. Note that the stock climbed up on a high volume spike to the 700 level on Apr 8 ‘11, failed to break through the dual resistance from the 700 level and the 200 day EMA, and has since been falling deeper into a bear market. All four technical indicators were looking overbought – clearly indicating a selling opportunity.

At its recent intra-day low of 407 touched on Oct 5 ‘11, the stock corrected 56% from its Nov 4 ‘11 peak. All four technical indicators looked oversold – hinting at another short-term rally. The market rally during Oct ‘11 helped the stock to climb above its falling 20 day and 50 day EMAs to a high of 503 on Nov 4 ‘11. This time, the overbought technical indicators signalled that the rally was over. The stock remains in a firm bear grip, and all rallies are being used to sell.

Q2 results were reasonably good. Top line increased by 19.4% on a YoY basis; bottom line rose by 13.6%. On a TTM EPS of 34.26, the stock is trading at a P/E of 13.3. But the negative sentiment in the capital goods sector may keep the stock’s price under pressure.

Bottomline? The stock chart pattern of Thermax Ltd has been in a bear grip for more than a year, and there doesn’t seem to be any respite in sight. But the company is fundamentally strong, well managed with negligible debt on its books. Just the kind that small investors should think about adding to their portfolio. The bear market isn’t over. No need to buy in a hurry. But slowly accumulating the stock may be a good idea.


ganesh said...


You had posted a FA and technical view on Sanghvi motors few months back..It has under performed, not sure if a SL was mentioned or may be i dint heed it, thought as a LT investment. Is it good to hold the same.
Also let me know whats your view on SL for LT investment.

Subhankar said...

I had last written about Sanghvi Movers in Jan '11. The stock was in a bear market, and a downside target of 116 was mentioned. It has fallen to a support level at 100. It may drop to 80. The company is paying the price of over expanding during good times, and has now been hit by the slow down in the infrastructure sector.

You should set a stop-loss every time you buy a stock - whether for short or long-term. Your risk tolerance should decide at what level the stop-loss should be. As a general thumb rule, use 8%. If you buy at 100, set the stop-loss at 92 on a closing basis.

LovelyGuy said...

Shubhankar, A ggod review of Thermax. Yes, I will pick your advise and start accumulating it, but slowly.

Ruy Guy said...

Yes, a very good review on Thermax. Would look at it closely to accumulate.
I am also looking forward to your review on Voltas, as and when you decide to post it, since it has fallen to two-digit levels and the earnings yield looks attractive right now.
Ruy Guy

Subhankar said...

@LovelyGuy: Thanks for your comments. 'Slowly' is the key word. Both macro and micro economic situations in India look pretty dodgy. Another 10-15% downside from current index levels is a possibility. Thermax is in a bear market, and may fall further.

@Ruy Guy: Appreciate your comments.

Voltas is falling in a bear market - getting hammered along with other infra and cap goods stocks. No sign of a turnaround yet. Q2 results show top and bottom line erosion. If Q3 is worse, the stock can go lower.

Ajay said...

Is it right time to enter this stock (currently at around 430)

Subhankar said...

Please read the earlier comments, Ajay, and you will find your answer.

The best time to buy is when you have the money. That doesn't mean you should buy all at once. Stagger your purchases and use stop-loss.