Stock Chart Pattern – Diamines and Chemicals (an update)

Shortly after posting the previous update, the stock chart pattern of Diamines and Chemicals had entered a long bear phase that finally ended at a closing low of 18 in Mar '14.

The subsequent rally took the stock price to a high of 50 in Sep '14 - a quick return of 177% in 6 months. Another correction ensued. The stock formed a 'double bottom' reversal pattern during Mar-Jun '15.

That was a signal that the bear phase had finally come to an end. But bulls didn't have it easy.

The stock price rose to a lower top of 46.40 on Aug 5 '15 and began a long sideways consolidation within a 'rectangle' pattern. A 'rectangle' - though unreliable - is usually a continuation pattern.

Since the stock price had entered the 'rectangle' from below, the expected breakout from it was upwards. The breakout finally occurred with good volume support on Oct 25 '16, after a couple of failed attempts.

A pullback towards the top of the 'rectangle' found good support from the rising 50 day EMA on Nov 18. The next leg of the rally ensued - giving an opportunity to enter for those who may have missed buying during the initial breakout above the 'rectangle'.

The stock faced resistance from the 72 level in Jan '17 and corrected nearly 20 points to a low of 52.50 on Feb 16 '17. The subsequent rally took the stock past 72 to a new closing high of 84.25 on May 16 '17 before correcting a bit.

Daily technical indicators are in the process of correcting overbought conditions. The company has declared very good Q4 (Mar '17) results after a couple of years of poor performance. Dips can be used to add. 

Stock Chart Pattern – Diamines and Chemicals (an update)

More than a year ago, I had analysed the stock chart pattern of Diamines and Chemicals, and had commented as follows:

‘The previous high of 80 is the next target. If that is taken out, and there is every chance that it will be, then the stock will be in ‘blue sky’ territory (which means uncharted, with no known resistances).’

The small-cap company issued bonus shares in the ratio of 1:2 in Jul ‘11, so the price levels mentioned in the previous post need to be divided by 1.5 to adjust for the bonus. The previous high of 80 (touched in Apr ‘10) has become 53.33 on the bonus-adjusted 2 years bar chart pattern:

  

Immediately after I wrote the post on Diamines and Chemicals in Sep 22 ‘10, the stock price surged past its previous high of 53.33 on a huge volume spurt to touch 64 on Sep 27 ‘10. But it turned out to be a ‘reversal day’, and the stock went into a sharp correction that received support from the 50 day EMA. An equally sharp bounce failed to get past the new high of 64.

The stock went into a sideways consolidation range during Nov and Dec ‘10, receiving frequent support from the 50 day EMA before breaking down below the 200 day EMA in Jan ‘11. After consolidating in a rectangular band between 44 and 52 for 4 months, during which all three EMAs became bunched together (signalling a sharp move), the stock price had an upward gap on May 17 ‘11 on good volumes.

The gap was partly filled on May 23 ‘11 before the stock embarked on the next leg of the rally that touched another new high of 87 on Jul 19 ‘11. But once again, the new high occurred on a ‘reversal day’, and the stock corrected by nearly 30% following the 1:2 bonus (marked by the light blue bell). Note that all four technical indicators reached lower tops as the stock touched a new high. The negative divergences gave advance warning of the correction.

The stock has been consolidating sideways for the past two months. The technical indicators are showing bullish signs, and the 20 day and 50 day EMAs have become entangled. The stock seems ready to make another up move.

The fundamentals are improving, with significant growth in top and bottom lines in year-ending Mar ‘11. Q1 results were much better on a YoY basis, and also showed growth on a QoQ basis. Most impressive is the fact that this small-cap stock has more than doubled in the past 2 years even as the Sensex has given negative returns.

Bottomline? The stock chart pattern of Diamines and Chemicals is in a strong bull market as characterised by higher tops and higher bottoms, and a rising 200 day EMA. Use dips to accumulate, but don’t forget to maintain a suitable stop-loss. Small-cap stocks can swing wildly on low trading volumes. That is what makes them risky.

Stock Chart Pattern – Diamines and Chemicals

It is no coincidence that the stock chart pattern of Diamines and Chemicals is the subject of this post. In a stock market trading near all-time highs and starved of new stock ideas, a good stock picker like Ashish Chugh can always manage to pull out a few rabbits from his hat.

Invariably, his suggested stock spikes up in value on a high volume surge almost as soon as the name is mentioned. Diamines and Chemicals has been around for quite a long while – incorporated in 1976, and production started in 1982.

It is the sole manufacturer in India of Ethylene Amines for over two decades and Piperazine since 2000. Ashish Chugh has covered most of the fundamentals in this interview. I would like to add my favourite metric – cash flow from operations, which was positive in 4 of the past 5 years.

The cash management has been prudent and the Debt/Equity ratio is now less than 1. Even with the spike in price today, the stock is trading at a P/E of 5.06. That gives an earnings yield (E/P) of almost 20% – more than double the current bank fixed deposit rates, leaving adequate ‘Margin of Safety’.

What don’t I like about this stock? In spite of its monopoly status, which almost ensures high margins, the company’s performance has been uneven. Sales were flat in FY ‘06 and FY ‘07; dipped by 14% in FY ‘08; then rose by 62% in FY ‘09 and 50% in FY ‘10. At the end of it all, the company has still not reached the Rs 50 Crores mark! Obviously, it is the only fish in a very tiny pond.

Let us look at the 3 years weekly bar chart pattern of Diamines and Chemicals:

For a small-cap stock, it has been a pretty remarkable recovery. From a peak of 78 on Jan 4 ‘08, the price dropped a whopping 78% to a low of 17 on Feb 6 ‘09. The stock had a sharp ‘V’ shaped recovery that retraced 92.5% of the bear market fall, when it touched a high of 73.45 on Jan 8 ‘10.

A good correction took the stock down to the 50 week EMA (equivalent to the 200 day EMA on a daily chart) at 47, where it received strong support. The correction retraced 46% of the rise from the low of 17 to the high of 73.45 – just short of the 50% Fibonacci retracement level.

The stock then jumped to a new high of 80 on Apr 16 ‘10, dropped down to the 50 week EMA again on May 21 ‘10 and has since been consolidating sideways between 50 and 70, till today’s break out. The previous high of 80 is the next target. If that is taken out, and there is every chance that it will be, then the stock will be in ‘blue sky’ territory (which means uncharted, with no known resistances).

The technical indicators are bullish. The RSI has moved up to the edge of the overbought zone. The slow stochastic is about to enter its overbought zone. The MACD is positive and just above the signal line. Expect a test of the 80 level soon, followed by a likely dip down to the 20 week or 50 week EMAs. That may provide better entry opportunities.

Bottomline? The stock chart pattern of Diamines and Chemicals is 10% below its all-time high. One needs to be cautious rather than euphoric when a stock is close to its all-time high. Those who got in earlier at lower prices tend to book profits at higher levels. Use the dip to enter – but remember to maintain a strict stop-loss.

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