Wednesday, May 2, 2012

Stock Chart Pattern - Maharashtra Seamless (An Update)

In the prior update (in Jan ‘11 – marked by grey vertical line on chart below) to the technical analysis of the stock chart pattern of Maharashtra Seamless, the ‘death cross’ of the 50 day EMA below the 200 day EMA (marked by light blue oval) technically confirmed a bear market.

Two of the technical indicators had shown positive divergences, but since the stock was in a bear market, investors were advised to exit. Earlier, during Oct-Nov ‘10, the stock had formed a double-top reversal pattern marking the end of its bull rally. After the stock price dropped to its 200 day EMA in end-Nov ‘10, it bounced up sharply but found strong resistance from its falling 20 day EMA in early-Dec ‘10.

It quickly dropped below its long-term moving average and after a couple of pullback attempts were thwarted, the stock price started cascading down like a waterfall. How has the stock fared thereafter, and is it a good time to consider a re-entry? Let us see what the closing chart pattern of Maharashtra Seamless foretells:

Mah Seamless_May0212

The stock price continued to fall till it found an intermediate bottom at 321 in Mar ‘11. A sharp bounce up past the 20 day and 50 day EMAs stalled at the 200 day EMA, which provided strong resistance during Apr-May ‘11. A breach of the long-term moving average occurred in Jun ‘11 but without any volume support. Upward break outs without volume support seldom sustain.

The stock managed to rally almost till the end of Jul ‘11 before resuming its down trend. Another attempt at a rally in Aug ‘11 failed to make much headway, formed a slightly lower top in Sep ‘11 and sank down to test its previous low of 321. Why didn’t the apparent double-bottom act as a reversal pattern? All four technical indicators touched lower bottoms in Oct ‘11 – the negative divergences suggested that the stock price could drop even further.

The upward bounce in Oct ‘11 was supported by two volume spikes – probably indicating that buyers stepped up thinking a bottom was in place. But the stock price failed to move above its 50 day EMA and plunged to a low of 300 in Jan ‘12. Note that the ROC and RSI touched lower bottoms, but the MACD and the slow stochastic reached slightly higher bottoms. However, the sharp ‘V’ shaped rally was unexpected. Maybe the commissioning of a 5 MW Solar power project at Jaisalmer, Rajasthan acted as a trigger.

The stock price moved up quickly past its three EMAs and the blue down trend line; and after correcting down to its rising 20 day EMA in Feb ‘12, climbed up to close at a 52 week high of 393 on Mar 13 ‘12. The 30% rise from the bottom and the ‘golden cross’ of the 50 day EMA above the 200 day EMA technically confirmed a return to a bull market.

The stock price again corrected down to its rising 20 day EMA, only to rise to 393 on Mar 30 ‘12. Was it a ‘double top’ reversal pattern that signalled an end of the rally? The bearish technical indicators seem to suggest so. The MACD is still positive, but falling below its signal line after forming a head-and-shoulders reversal pattern. The ROC is above its 10 day MA and touching the ‘0’ line. The RSI is just below its 50% level. The slow stochastic bounced up a bit from the edge of its oversold zone. The last three have all touched lower tops. So, the correction from the second top was expected.

The volume confirmation for a ‘double top’ is lacking. Transaction volume during the first top was lower than the volume during the second top (not visible in chart). It should have been the other way around for the ‘double top’ to be valid. The company is conservatively managed with low debt, and business seems to be coming back on track. One can enter with a stop-loss at the 50 day EMA (currently at 372).

Bottomline? The stock chart pattern of Maharashtra Seamless has shaken off the bears and seems to be consolidating after completing the first leg of its up move in a new bull market. The adventurous can make an entry, and add more on dips. The more prudent can wait for Q4 results before entering.


Ajay said...

Is it a good time to add this stock in portfolio. Low debt recent ROE and conservative managment available at reasonable PE and almost at BV.

Subhankar said...

The short answer is: No.

Fundamentally, Q2 results were disappointing with top and bottom lines shrinking by 20% and almost 50% respectively.

Technically, the stock has fallen off a cliff, with no sign of a bottom formation.

Ajay said...

You were again spot on warning against entering in this stock in Dec 12. It has corrected about 20% since December 2012. The company's results are disappointing, but if everything is right then price will also be high. On a PE and P/BV basis, the stocks is at 3 year low, of course PE can change based on earnings. leave apart fundamental, what is the right level to consider getting in to this stock. 230 - 240 range, where it bottomed out in June 2006 and July 2009?

Subhankar said...

No sign of a bottom yet, Ajay. Next support is in the 200-220 zone.

Stock is looking oversold and some of the technical indicators are showing positive divergences by touching higher bottoms. That could lead to an upward bounce - which may invite bear selling.

Wait for Q3 results and any signs of a turnaround. It is always advisable to buy a stock when price is on the way up rather than on the way down.

Ajay said...

Its 6 months now and stocks is now below 200. Is is bottoming out or more downside on the offing. Again results were bad, sales down and poor visibility on growth (negative comment by management on growth prospects)... Is this a stock to be written off... It was touted as a investment worthy stock always.

Subhankar said...

After the previous low of 290 (Jan '12) was tested and broken (in Dec '12), the stock price collapsed.

There is no sign of a bottoming pattern yet. The global economic slowdown has affected export-oriented companies like Mah. Seamless.

You can consider an entry only if 290 is crossed convincingly.