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Thursday, July 26, 2012

Stock Chart Pattern - JK Lakshmi Cement (An Update)

The previous update to the analysis of the stock chart pattern of JK Lakshmi Cement was posted back on Mar 9 ‘11 (marked by grey vertical line on chart below). The stock was falling deep into a bear market after touching a high of 85 in Jan ‘10.

Positive divergences were visible in ROC and RSI indicators as the stock fell lower. That observation was the reason for the following comments: “The positive divergences can lead to a rally that may take the stock price above the 48 level. But bulls shouldn’t get too excited. The technical indicators are hinting at only a mild rally…The stock chart pattern of JK Lakshmi Cement doesn’t appear to have found a bottom yet.”

As it turned out, the stock price behaved almost exactly as per expectations. The stock rallied briefly by rising above the 48 level and its three EMAs to touch an intra-day high of 56.80 on Apr 7 ‘11. After a drop to its 20 day EMA, the stock rose again to touch an intra-day high of 56.55 on Apr 21 ‘11. A volume spurt may have indicated a continuation of the rally, but it turned out to be a double-top pattern.

The stock resumed its down trend, and dropped to an intra-day low of 35.50 on Aug 26 ‘11 – just short of the downside target of 34. Note that stock prices tend to fall short of downside targets in bear markets and overshoot upside targets in bull markets.

JKLakshmi Cement_Jul2612

The 18 months daily bar chart pattern of JK Lakshmi Cement formed an interesting ‘W’ shaped double-bottom reversal pattern by rallying up to the 48 level and then dropping to a slightly higher bottom of 36.60 on Dec 29 ‘11.

The subsequent rally coincided with the rally in the broader market. A huge volume spurt propelled the stock’s price well above the 48 level in Feb ‘12. It is very unlikely that the price will fall below 48 in a hurry. Instead of sliding down from its Feb ‘12 top – like the indices and most stocks – the stock entered into a sideways rectangular consolidation pattern.

Rectangular consolidation patterns tend to be continuation patterns, which means the stock price was expected to resume its up trend after the break out from the rectangle. A high volume spike validated the break out earlier this month, and took the stock price to an intra-day high of 83 on Jul 4 ‘12.

After consolidating within a small symmetrical triangle pattern, the stock price has broken out upwards on another volume spurt. But this time, the bulls may have overplayed their hand. Note that all four technical indicators touched much lower tops as the stock price touched a new intra-day high of 86.60 today (Jul 26 ‘12). The combined negative divergences should lead to a correction or consolidation at any time.

All three EMAs are rising and the stock is trading above them – a clear sign of a bull market. However, both the stock price and its 20 day EMA have moved too far above the 200 day EMA. Such a condition usually precedes a correction or consolidation.

Technical indicators are bullish, but showing weakening signs. MACD is positive, entangled with its signal line and moving sideways. ROC is touching its 10 day MA in positive territory, after briefly entering its negative zone. RSI has dropped from its overbought zone, but is above its 50% level. Slow stochastic has re-entered its overbought zone.

Cement is not my favourite sector because it is very capital intensive, and cyclical and seasonal price behaviour makes it an ‘avoid’ for most small investors. But what I like about this company is its steadfast resolve in expanding capacities even during down turns. A share buy-back is ongoing.

Bottomline? The stock chart pattern of JK Lakshmi Cement formed a double-bottom reversal pattern that ended a 2 years long bear market. The stock has not only re-entered a bull market, but has recovered its entire capital loss in seven months. Add on dips – provided you are nimble enough to get out before the cement cycle turns down again.

1 comment:

Subhankar said...

JK Lakshmi Cement has declared excellent Q1 results: