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Wednesday, February 1, 2012

Stock Chart Pattern - Sanghvi Movers (An Update)

In the previous update of the stock chart pattern of Sanghvi Movers back in Jan '11, the stock had broken down below a bearish descending triangle pattern. Descending (and ascending) triangles have measuring implications. The downward target was calculated as 116. Stock prices don't really understand or follow arithmetic. Actual targets are never exactly met. Prices typically overshoot upward targets and fall short of downward targets.

So, what happened? The two years bar chart pattern of Sanghvi Movers is an example of how a fundamentally strong stock with a good business model can suffer when sentiments turn negative towards the sector in which the company operates:

The stock fell to a high volume 'panic bottom' of 114 in Feb '11, meeting the downward target of 116 almost exactly. It bounced up sharply - only to face resistance from the falling 50 day EMA and then dropped past its 'panic bottom' of 114 to a low of 104 in Mar '11. 'Panic bottoms' seldom hold and this is another example of it. But that doesn't prevent intrepid investors from trying to bottom-fish - and get stuck at higher levels.

Note that both the RSI and the slow stochastic were deep inside their oversold zones when the stock price dropped to 104. A correction to the earlier down move usually follows. The ROC touched a higher bottom and hinted at a possible correction or consolidation. Over the next 8 months, the stock price consolidated within a bearish 'rising wedge' pattern - oscillating around its entangled 20 day and 50 day EMAs. Throughout the consolidation period within the 'rising wedge' pattern, the 200 day EMA continued to fall - leaving no doubt that the bears were in control.

After breaking downwards below the 'rising wedge' on Nov 14 '11, the stock price attempted a pullback to the wedge. Such pullbacks after a downward break happen often, and provide a selling opportunity. The stock continued to fall on high volumes and dropped to a low of 84.50 on Jan 2 '12. It has since been trading within a small symmetrical triangle, and may seek even lower levels.

The technical indicators are bearish, but showing faint signs of improvement. The MACD is above its signal line, but in negative territory. The ROC is below its 10 day MA, and trying to climb out of the negative zone. The RSI dropped below its 50% level, but trying to rise. The slow stochastic fell inside its oversold zone, and is trying to come out.

The infrastructure sector has turned from being a darling of investors to a villain. Stocks of almost all companies with any links to the sector are getting hammered - regardless of their underlying fundamentals. The stock of Sanghvi Movers has been no exception. Debt/equity ratio is more than 1, but for a capital intensive company, that shouldn't be a major issue. Cash flows remain positive. Margins are definitely under pressure - but that is a common feature with stocks from almost all sectors. But the market knows best. No point in betting against it.

Bottomline? The stock chart pattern of Sanghvi Movers is facing technical headwinds though fundamentals appear to be reasonable. As and when the infrastructure sector starts picking up, the company will again start making a lot of money. But that seems a couple of quarters away. Watch Q3 and Q4 results before considering an entry.

5 comments:

satvinder said...

Thanks, Sir, I've started sip in this share from 126 and the lowest sip was at 89, will add next sip after watching a few results.

Satvinder

bapu52 said...

Thank you sir for your rationale feedback on Sanghvi movers.

Subhankar said...

Appreciate your comments.

Ajay said...

Dear Subhankar,

The stock is certainly beaten down as if there is no business happening and that no more need for the cranes in India. Is it the time to take a bold step to enter in to the stock with a contra view. Dividend yeild is also attractive, if infrastructure performs, this stock should do well right.

Appreciate ur views.

Subhankar said...

No sign of a bottom formation yet, Ajay. So it is best avoided.

If you want to take a punt, keep a stop-loss at 45.