Thursday, November 15, 2012

Stock Chart Pattern - Carborundum Universal (An Update)

The previous technical update to the stock chart pattern of Carborundum Universal (date marked by grey vertical line on chart below) had the following concluding comments: “The stock chart pattern of Carborundum Universal is consolidating after a strong rally. Existing holders can book partial profits. New entrants can add on the likely dip.”

A week after the previous post, the stock price rose to touch a new high of 164 before dropping sharply below its 20 day and 50 day EMAs to a low of 132 in Aug ‘11 – providing a profit booking and a re-entry opportunity.

Note that in Oct ‘11 (marked by light blue bell in chart below), the face value of the stock was split from Rs 2 to Rs 1, which means the number of stocks doubled without any increase in equity capital. All stock prices mentioned in the previous update needs to be divided by 2 for comparison purposes.


After the 2:1 stock split in Oct ‘11, the stock price rose to touch a new intra-day high of 174 in Nov ‘11, but RSI and slow stochastic indicators failed to touch new highs (marked by blue arrows). The negative divergences hinted at a possible correction – which came swiftly. The stock dropped below all three EMAs to touch an intra-day low of 131 in Dec ‘11.

The subsequent sharp rally in Jan and Feb ‘12 coincided with the rally in the broader market. The stock rose to a slightly lower top of 173 in Feb ‘12, but all four technical indicators touched higher tops. Positive divergences indicated that the bulls were not quite done yet.

After a correction below 20 day and 50 day EMAs in Mar ‘12, the stock price rose quickly to touch a new intra-day high of 175 in Apr ‘12. This time, all four technical indicators touched much lower tops (marked by blue arrows). The combined negative divergence stalled the bulls on their tracks.

After dropping below all three EMAs to an intra-day low of 141.50 in Jun ‘12, the stock has been in a sideways consolidation, alternately moving above and dropping below its 200 day EMA. For the past 17 months, the stock price has been consolidating within a wider rectangular band between 132 and 174 – frustrating long-term holders.

Technical indicators are looking bearish, to the point of being oversold. MACD is falling below its signal line in negative territory. ROC is also negative, but has crossed above its 10 day MA. RSI and slow stochastic are both near the edge of their oversold zones.

Bottomline? The stock chart pattern of Carborundum Universal has been in a long period of consolidation. Like many companies in the infrastructure and capital goods sectors, it is facing a triple whammy of higher input costs, Rupee depreciation and slow down in export markets. Margins are under pressure, and it may take a while before net profit starts to improve. But the company has a strong balance sheet, with low debt and positive cash flows from operations. Patient investors can accumulate on dips towards the lower edge of the consolidation range.


Brijesh Sharma said...

I have been following your analysis for some time now and find it quite accurate. I am a beginner in stock market and feel Kajaria can be a wonderful stock based on consumption theory and considering its EPS CAGR of 40% over last 5 years.

May I request your valuable analysis /guidance on Kajaria Ceramics.

Thanks and regards - B K Sharma

Subhankar said...

Thanks for your comments.

I don't track Kajaria Ceramics, so can't comment on fundamentals.

The price chart shows a long bull phase - but currently undergoing a correction. The dip can be used to add to existing holdings.