Wednesday, December 28, 2011

Stock Chart Pattern - Cummins India (An Update)

In the previous analysis of the stock chart pattern of Cummins India in Dec ‘10, it was mentioned that the stock was in a bull market but facing some technical headwinds after touching an all-time high. Existing holders were advised to hold or book partial profits. New entrants were advised to await a bigger correction.

Despite being a well-managed, fundamentally strong and investor-friendly company, the Cummins India stock hasn’t fared well in 2011. It happens to be in the capital goods sector, which is completely out of favour with investors. Just goes to show that even the best of stocks can get badly mauled by bears.

Instead of chasing after ‘theme’ stocks with questionable management, small investors can benefit by periodic profit booking at or near all-time highs and buying the same stocks back at much lower prices. Let us see if the Cummins India stock is providing such an opportunity:


Note that after closing at an all-time high of 574 (adjusted for 2:5 bonus in Sep ‘11) on Nov 1 ‘10, the stock made a rare triple-top reversal pattern – marked T1, T2 and T3 on the chart. T1 itself formed a small double-top. After a long bull rally, a reversal pattern formation is the norm.

The stock price dropped sharply below the 200 day EMA to 440 in Feb ‘11, only to bounce up and start a counter-trend rally that formed a bearish ‘rising wedge’ pattern over the next three months. Those who failed to heed the warning from the triple-top were given another chance to exit the stock. The break below the ‘rising wedge’ in May ‘11 was followed by two unsuccessful pullback attempts.

Instead of falling, the stock price consolidated sideways during the first part of Jun ‘11. It then formed a small inverse head-and-shoulders pattern, followed by a brief rally above all three EMAs in Jul ‘11. In the process, all three EMAs got entangled together (marked by light blue oval) – which usually precedes a sharp move.

The RSI made a head-and-shoulders pattern in Jul ‘11. So, it was no surprise that the sharp move was downwards. The ‘death cross’ of the 50 day EMA below the 200 day EMA confirmed the bear market. The 440 support level was breached on a volume spike in Aug ‘11. Several subsequent attempts by the stock to break above the 440 level got thwarted – an example of how a support level turns into a resistance level.

The bonus issue (marked by light blue bell) in Sep ‘11 could not stem the rot. The stock continued its fall with the 20 day EMA acting as resistance to all up moves. The stock dropped to a lower bottom in Dec ‘11 but the MACD and ROC made higher bottoms (marked by blue arrows). The positive divergences – not supported by the RSI and the slow stochastic -led to a brief bounce.

The technical indicators are looking mildly bullish. The MACD is negative, but rising above its signal line. The ROC is above its 10 day MA and trying to stay positive. Both the RSI and the slow stochastic have just about managed to move above their 50% levels. The widening gap between the falling 50 day and 200 day EMAs can be a prelude to a period of consolidation.

At its Dec ‘11 closing low of 326, the stock price has corrected 43% from its Nov ‘10 closing high. Another 10-15% correction from current levels can’t be ruled out. But if you have the patience to wait 2-3 years, you can start accumulating the stock slowly. (Prudence dictates that you wait for a bottom reversal pattern to form and then start your buying – provided of course that you can identify a bottom reversal pattern if you see one.)

Bottomline? The stock chart pattern of Cummins India is in a strong bear grip, with no sign of a turnaround yet. The company has sensibly expanded manufacturing facilities during a period of slow down – and will be in a good position to benefit from the eventual return to growth. This is the kind of stock that small investors should hold in their long-term portfolios.


Ruy Guy said...

Subhankar da,
Another superb post. Cummins is one of my stocks in the core portfolio and it feels good to heed your words and sold 10% of my original quantity when your last post appeared.
To me, these are the stocks who help you build actual wealth! Thanks again!

Subhankar said...

Appreciate your comments, Sanjib.