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

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

 

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.

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.

Stock Chart Pattern - Carborundum Universal (An Update)

In the previous update to the analysis of the stock chart pattern of Carborundum Universal, I had observed negative divergences in the technical indicators after the stock had reached a new high of 231 on Jul 27 ‘10. Volumes were massive that day, which some times indicates buying exhaustion.

Accordingly, investors were cautioned about a possible correction down to the 200 day EMA (at 180), or even lower to the support level of 165. The stock did correct, dropping below its 20 day and 50 day EMAs, but found support at the long-term support-resistance level of 204 in end-Aug ‘10. The dip of 12.5% from the top of 231 was a healthy bull market correction.

Let us see how the chart pattern shaped up from the one year bar chart pattern of Carborundum Universal:

The stock bounced up sharply, backed by good volumes, and embarked on a strong rally during Sep and Oct ‘10 – reaching a new high of 279.50 on Nov 1 ‘10. But the RSI and slow stochastic failed to reach new highs (marked by blue arrows) – a warning about a possible correction.

The correction coincided with the ones taking place in the Sensex and Nifty. The stock price dropped to 224 on Nov 29 ‘10 – a 20% correction that underperformed the Sensex – and then went into a sideways consolidation with a downward bias that breached the 200 day EMA on Mar 14 ‘11.

A double-bottom at 217 ended the correction. Note that the stock price spent 12 straight trading days below the long-term moving average – raising the spectre of a bear market. But neither the 20 day EMA, nor the 50 day EMA dropped below the 200 day EMA – keeping the bull market intact.

The end to the correction was confirmed by the positive divergences in the ROC (which made a higher bottom) and slow stochastic (which made a flat bottom), as the stock price made a lower bottom at 217 (marked by blue arrows).

A spectacular 3 months long rally that outperformed the Sensex, culminated in a new high of 320 on Jul 11 ‘11. But the ROC and RSI reached lower tops and the slow stochastic made a flat top (marked again by blue arrows).

The technical indicators have started weakening as the stock has started a sideways consolidation. The MACD is positive, but has crossed below its signal line. The ROC is also positive, but has fallen below its 10 day MA. Both the RSI and slow stochastic have dropped from their overbought zones, and are headed downwards.

A correction down to the rising 50 day EMA is a possibility. The stock is in a bull market, and dips can be used to add. The company is fundamentally strong, investor friendly, with prudent financial management and steady growth. The stock can make an excellent addition to a small investor’s portfolio.

Bottomline? 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.

Stock Chart Pattern - Carborundum Universal (An Update)

Last August, the stock chart pattern of Carborundum Universal was rising in an ascending triangle pattern, after hitting a double-top at 140 followed by a correction down to the 200 DMA at 101.

Ascending triangles are fairly reliable trend indicators, but I had sounded a note of warning because the RSI and slow stochastic were indicating negative divergences – making lower highs as the stock moved higher.

However, the volumes were gradually rising, supporting the up move. I had recommended that investors should wait for a break out above 140 before buying. Those who heeded my advice are sitting on 50% gains – outperforming the Sensex, which has gained 20% in the same period.

Let us take a look at the bar chart pattern of Carborundum Universal:

The ascending triangle pattern almost failed, but the stock price did break out above 140 on a volume spike in early Sep ‘09, just before reaching the apex of the triangle. Note how the 140 level, which had acted as a resistance, became a support level after the upward break out.

From Nov ‘09 to Jan ‘10, the stock embarked on a sharp rally to hit a high of 204. Volumes rose significantly, but have a look at the RSI. It made a series of flat and slightly lower tops, as the stock was making new highs.

The negative divergence led to a 5 months long sideways consolidation between 165 and 204. The bottom at 165 coincided with the previous top made in Sep ‘09. Bull market corrections tend to find support at previous tops.

The stock broke above the consolidation zone on good volumes in Jun ‘10, after forming another bullish ascending triangle formation. The resistance level of 204 has since turned into a support level. The 50 DMA is also providing good support to the up move.

The Carborundum Universal stock made a new 3 year high of 231 on a huge volume spike – which could be a sign of buying exhaustion. All three technical indicators – MACD, RSI, slow stochastic – made lower tops. The negative divergences warned of an ensuing correction. The stock is currently seeking support from the rising trend line, the 50 DMA and the 204 level.

If the stock breaks below the combined support, it can go down to the 200 DMA at 180, and further to the lower end of the consolidation zone at 165.

Bottomline? The stock chart pattern of Carborundum Universal is facing some headwinds after hitting a new high. The company is strong fundamentally and is growing steadily - generating good profits and cash flows. Existing investors can book part profits and redeploy at lower levels. New entrants can enter in the 165-180 zone.

Stock Chart Pattern - Carborundum Universal

The stock chart pattern of Carborundum Universal, much like the chart pattern of Havell's discussed yesterday, is forming a bullish 'ascending triangle' formation that could lead to an upward breakout.

Why is a conservative, 55 year old abrasives and refractories manufacturer from the Murugappa stable quoting at a P/E of 22? Is it because of its shareholder friendliness, giving regular bonus issues and dividends? Or, is it the conservative and prudent management that believes in growing slowly and steadily, keeping debt under control and using cash generated from operations to part finance the growth? Or, is it due to the carefully managed global ambition being achieved through judicious acquisitions in India, Russia and South Africa plus a joint venture in China?

In spite of several bonus issues, the current equity is only Rs 18 Crores, and with reserves at 20 times the equity, can another bonus issue be around the corner? Promoter holding of 43%, FII holding of 9%, debt-to-equity ratio less than 1 are other positives for taking a closer look at the Carborundum stock.

The one year bar chart pattern of Carborundum Universal is another example of how Fibonacci retracement levels appear time and again on stock charts:-

After hitting a peak of 215 (face value Rs 2) on Jan 12, '07, the stock fell into a long bear market that ended with a double-bottom - 76 on Oct 27, '08 and 77 on Mar 25, '09. The subsequent rally took the stock to 140 on June 1, '09 - retracing 46% of the entire fall.

A double-top made on June 23, '09 resulted in a good correction down to 101 on Jul 13, '09 - just less than the 61.8% Fibonacci retracement of the rally. A sharp rally temporarily breached the double-top of 140, only to find resistance at 145 - the exact 50% Fibonacci retracement of the fall from 215 to 76!

In the process, a bullish 'ascending triangle' has formed on the chart, with a strong probability of a break out upwards. Increasing volumes of late - though not clearly visible on the chart - are supporting the rally. The negative divergences in the technical indicators - the RSI, MFI, MACD and slow stochastic have all made lower tops - are concerns that the up move can face headwinds.

Bottomline? The stock chart pattern of Carborundum Universal may give an upward breakout. Investors should wait for the breakout before entering (keeping the 3% 'whipsaw' leeway in mind).