Stock Chart Pattern - Great Eastern Shipping (an update)

These were introductory comments in the previous post on Great Eastern Shipping 7 years ago: "Fundamentally strong, with very good profit margins, strong cash flows from operations, low P/E ratio, regular dividends - all the hallmarks of a stock that should adorn any long-term portfolio."

The shipping sector has been facing a pressure on freight rates for quite some time due to an excess supply of vessels - compounded by a slowdown in the Chinese economy and low oil prices that have affected offshore drilling business.

In spite of such headwinds, India's largest private sector shipping company has produced stellar results. Consolidated net profit of Rs 1039 Crores with NPM of 25.5%; diluted EPS of 68.8 giving a P/E ratio of 5.3; net cash flow from operations of a massive Rs 2047 Crores; debt/equity ratio at a manageable 0.55; dividend yield of 3.7% on CMP.

Yet, the chart below shows the stock price has been in a 2 years long down trend (marked by blue down trend line). Is this a value investing opportunity, or what? 

The stock price had touched a 2 years high of 460 on Sep 15 '14 only to drop into a long correction-cum-consolidation phase. After forming a 'rounding bottom' reversal pattern, the stock rose to touch a high of 399 on Aug 13 '15 but retreated after facing strong resistance from the blue down trend line.

Continuing with the consolidation within a 'rounding bottom' pattern, the stock price breached the down trend line and touched a high of 420 on Nov 10 '15, but formed a 'reversal day' pattern (higher high, lower close) that triggered a sharp correction below its three EMAs into bear territory.

The stock price formed a small 'double bottom' reversal pattern at 275 on Mar 2 '16 and rallied past its 20 day and 50 day EMAs, but failed to overcome strong resistance from its 200 day EMA. Another correction-cum-consolidation ensued.

After forming another 'rounding bottom' reversal pattern (clearly visible on the 20 day and 50 day EMAs), the stock price rallied past its 200 day EMA into bull territory and has breached the blue down trend line once again.

Daily technical indicators are looking overbought. That means the upside may be limited in the near term. Those who understand the nitty-gritty of the shipping business may consider gradual accumulation.

Stock Chart Pattern - Great Eastern Shipping

Before I start discussing about the stock chart pattern of Great Eastern Shipping, I would like to thank reader Abhijit for suggesting this particular stock.

I have long admired the performance of Great Eastern Shipping. Fundamentally strong, with very good profit margins, strong cash flows from operations, low P/E ratio, regular dividends - all the hallmarks of a stock that should adorn any long-term portfolio.

Yet, I never got around to buying the stock. I could never figure out why or when the Baltic Dry freight index would go up or down. What was its exact relationship with the profitability of shipping companies. Whether buying or selling or leasing ships and rigs made more sense at a particular time or not.

In other words, the shipping industry does not fall within my 'circle of competency'. If one doesn't have some knowledge about how an industry or sector works, it is better to avoid investing in that sector. There are plenty of good stocks in a lot of different sectors.

For those who understand - or know some one that understands - the nitty-gritty of the shipping industry, Great Eastern Shipping should be their number one choice.

A look at the one year bar chart pattern of Great Eastern Shipping will indicate that there are a couple of interesting recent formations:-

The stock entered a sideways rectangular consolidation pattern - much like that of the BSE Sensex index - after the low of Rs 139 made on Oct 27, '08. It subsequently made lows of 144 in Dec '08, 142 in Jan '09 and 143 in Mar '09.

The triple bottom was followed by a rally - again tracking the BSE Sensex index - from 143 to 316 in Jun '09, a gain of 120%. But the high of 316 only equalled the high made in Oct 1, '08. The later part of the rally from May '09 onwards was on much higher volumes.

Note how the stock was making new highs right through April, May and early June '09 whereas the RSI remained almost flat around the 70% level. This negative divergence led to a sharp correction, that took the stock down to 212 on July 13, '09 - a correction of 60% of the entire rise from 143 to 316.

The 60% correction is close to the Fibonacci correction level of 61.8%. If the stock went below the 61.8% level, then technically, the it would have re-entered the bear market. Here came another interesting twist to the tale.

While the stock was making lower bottoms of 229 in Jun '09 and 212 in Jul '09, the RSI made higher bottoms - a positive divergence. The up moves of Tuesday (Jul 14) and Wednesday (Jul 15) - again tracking the Sensex - moved the stock up sharply above the confluence point of the 20 day and 50 day EMAs as well as above the down-sloping trend line connecting the lower tops of Jun and Jul '09.

By the smallest of margins, the stock has managed to survive the bear onslaught - at least for the time being. The technical indicators seem to be supporting an up move.

The MACD is negative and below its signal line. But it is turning up and may cross the signal line soon. The slow stochastic has moved up sharply from the oversold region. The OBV is tracking the stock, as it is supposed to do. The volume is also supportive.

Bottomline? The stock chart pattern of Great Eastern Shipping is suggesting that for interested investors, this may be a good time to enter. But buy only a small quantity. Why? The stock has a tendency to track the Sensex - which had a 'pullback' to the neck-line of a bearish head-and-shoulders formation. Should the Sensex crack downwards, the stock may follow suit.