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Friday, June 13, 2014

Technical updates – Bharat Bijlee and Carborundum Universal

Modi-led NDA’s election victory seems to be bringing in good news. Consumer inflation (CPI) moderated a bit. More importantly, the IIP number showed an up-tick. Neither of these had anything to do with NDA’s victory, but occurred due to a gradual improvement in the economy.

The stock market is supposed to discount good (and bad) news in advance. Nowhere is this more evident than on the chart patterns of ‘infrastructure’ stocks. After prolonged slumber in bear markets, these stocks have not only woken up but are trying to make up for lost time in a hurry.

The stocks of Bharat Bijlee and Carborundum Universal are no exceptions. Both stocks touched their lows in Aug ‘13 and rose sharply to touch 2 year highs in 10 months. Have the fundamentals of both companies suddenly improved? Unlikely. These look like technical price spurts, which are unlikely to sustain. Be careful if and when you enter.

Bharat Bijlee

Bharat Bijlee_Jun1314

The stock of Bharat Bijlee touched a low of 274 in Aug ‘13, but made a ‘V’ shaped recovery followed by an accumulation period that lasted 7 months. The 200 day EMA provided strong resistance during Dec ‘13 and Jan ‘14. The stock price dropped below all three EMAs to touch a higher bottom of 326 in Feb ‘14. That was the signal that the bulls were waiting for.

A sharp price spurt above all three EMAs on strong volumes in Mar ‘14 propelled the stock into a bull market that was technically confirmed by the ‘golden cross’ of the 50 day EMA above the 200 day EMA.

The stock price rose to touch a 2 years high of 730 on Jun 9 ‘14 – gaining more than 150% from its Aug ‘13 low. Note that the bullish enthusiasm was not shared by the technical indicators, which showed negative divergences by touching lower tops. A price correction has set in. The stock price may drop to test support from the 600-620 zone.

Carborundum Universal

Carborundum_Jun1314 

The stock price of Carborundum Universal went through a gradual bottoming process, touching multiple lows around the 100 level during Aug ‘13. The sharp rise above all three EMAs on a volume surge took the stock to a high of 152 in Jan ‘14 – a quick 50% gain in 5 months.

Negative divergences in the technical indicators was followed by a correction that successfully tested support from its rising 200 day EMA. The subsequent rally ended with the stock price touching a 2 years high of 190 on Jun 9 ‘14.

Note that the stock price touched a higher top, but ROC and RSI touched lower tops while MACD and Slow stochastic formed ‘double-top’ reversal patterns that warned of a correction. There is a long-term support zone between 150-162, which the stock may test on the way down.

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