Thursday, January 3, 2013

Stock Chart Pattern - Cummins India (An Update)

Within two weeks of posting the previous update on the stock chart pattern of Cummins India (marked by grey vertical line on chart below) on Dec 28 ‘11, the stock price completed a rare ‘diamond’ bottom reversal pattern and broke out upwards on a volume surge.

Patient investors had been advised to accumulate the stock, or await the formation of a bottom reversal pattern to enter. Those who were fortunate enough to heed my advice are sitting on a Rs 200 (58%) gain in just over a year – outperforming the Sensex by almost 100%.

What if you missed the rally and wish to enter now? Let us take a look at the daily bar chart pattern of Cummins India to identify possible entry opportunities:


The bull rally following the break out from the ‘diamond’ pattern coincided with the rally in the broader market. The stock price rose sharply to touch an intra-day high of 485 on Feb 10 ‘12. Note that all four technical indicators looked highly overbought, and warned of a correction or consolidation.

While the Sensex went into a corrective mode, Cummins’ stock consolidated sideways with an upward bias. The ‘golden cross’ of the 50 day EMA above the 200 day EMA (marked by light green oval) technically confirmed a return to a bull market.

The stock price rose to touch a new intra-day high of 505 on Apr 2 ‘12. But it turned out to be a ‘reversal day’ (higher high, lower close). All four technical indicators touched lower tops (marked by blue arrows). The combined negative divergences and the ‘reversal day’ pattern warned of a correction.

After consolidating sideways with a downward bias during Apr ‘12, the stock price fell sharply below all three EMAs and touched an intra-day low of 396 on May 23 ‘12. But it turned out to be a ‘reversal day’ (lower low, higher close), which coincided with all four technical indicators in oversold zones.

The subsequent rally within an upward-sloping channel has entered its eighth month and touched a new 52 week intra-day high of 542 in today’s trading. But there are some dark clouds on the horizon. Three of the four technical indicators touched lower tops while the stock rose higher.

The stock price is also at the upper edge of the channel, where it is likely to face resistance. The all-time high of 574 touched in Nov ‘10 (adjusted for 2:5 bonus) is less than 40 points away. There is usually some hesitation near all-time high levels.

Cummins is a debt-free, investor-friendly company with strong positive cash flows. It continues to perform well despite declining exports and a slow down in the capital goods sector. Valuations are looking a bit stretched. It may be prudent to wait for a dip to enter.

Bottomline? The stock chart pattern of Cummins India is in a bull market. Earnings are likely to improve due to expanded capacity and expected lower interest rates in the next few quarters. It is the kind of stock that will help small investors build wealth. If you don’t wish to time your entry, start a monthly SIP.


Manish said...

Very nice analysis. Would request if you may do an analysis at Cairn India too. I guess it is breaking out now.

Subhankar said...

Please check out the update on Cairns India posted on Jan 25 '13. The attempt at a break out appears to have failed.

Ajay said...

Repeatedly testing the 440level and bouncing back. The stock has not fallen much like other capital goods/power sector stock. Is it time to initiate purchases in small lots as you advised in your post!

Subhankar said...

The stock broke below the upward-sloping channel - followed by a pullback towards the lower end of the channel, and then a steep fall.

The stock is in a clear downtrend in a bear market and has fallen more than 20% from its Jan '13 peak.

You can accumulate with a strict stop-loss at 400. Alternatively, wait for a convincing move above 440 to enter. The second option is the more prudent one.