Technical updates – L&T and JK Lakshmi Cement

Stocks from the infrastructure sector were in doldrums due to the economic slowdown, and had fallen to two year lows during the second quarter of 2013-14. The ground-swell from Modi’s campaign brought them out of bear markets.

Once the Modi government came to power, many infrastructure stocks rose spectacularly, and provided multibagger gains. However, during the past one year, there has not been much progress in disentangling of stuck projects or initiation of new ones. High interest rate also played spoilsport.

Earnings of infrastructure companies haven’t kept pace with their stock prices. While stock prices haven’t crashed, large-cap and mid-cap stocks are down from their two year highs, and have entered sideways consolidations. The stocks of L&T and JK Lakshmi Cement are good examples.

L&T

After a 1:2 bonus issue in Jul ‘13 (marked by bell on chart), the stock of L&T dropped to a low of 695 on Sep 3 ‘13. From there, it rose to touch a high of 1752 on Jun 9 ‘14 – a huge 150% gain in 9 months.

The stock has since been in a sideways consolidation within a ‘rectangle’ pattern. The stock broke out above the ‘rectangle’ on good volume support and touched a two year high of 1843 on Mar 2 ‘15. But it failed to sustain above the ‘rectangle’. It subsequently formed a ‘head-and-shoulders’ reversal pattern with an upward-sloping neckline within the ‘rectangle’, and corrected below its 200 day EMA.

Daily technical indicators are looking bearish and oversold. A pullback towards the upward-sloping neckline is a possibility. A ‘rectangle’ pattern is usually a continuation pattern – which means the eventual break out should be upwards. But there has already been a failed break out and a reversal pattern formation. It may be better to wait for upcoming annual results to decide whether to buy, sell or hold.

JK Lakshmi Cement

The stock of JK Lakshmi Cement rose from a two years low of 55, touched on Aug 5 ‘13, to a two years high of 407, touched on Jan 19 ‘15 – a whopping 640% gain in less than 18 months. The stock has been consolidating sideways within a ‘rectangle’ pattern with a downward bias since touching its Jan ‘15 high.

The stock is currently receiving twin support from the lower edge of the ‘rectangle’ (at 340) and its 200 day EMA. Despite the correction, valuation looks quite stretched.

Daily technical indicators are in bearish zones, but showing some upward momentum. A technical bounce is a possibility. Sequential QoQ results have shown decline in top and bottom lines for the past three quarters. Check annual results before initiating any action.

Stock Chart Pattern - JK Lakshmi Cement (An Update)

The previous update to the analysis of the stock chart pattern of JK Lakshmi Cement was posted back on Mar 9 ‘11 (marked by grey vertical line on chart below). The stock was falling deep into a bear market after touching a high of 85 in Jan ‘10.

Positive divergences were visible in ROC and RSI indicators as the stock fell lower. That observation was the reason for the following comments: “The positive divergences can lead to a rally that may take the stock price above the 48 level. But bulls shouldn’t get too excited. The technical indicators are hinting at only a mild rally…The stock chart pattern of JK Lakshmi Cement doesn’t appear to have found a bottom yet.”

As it turned out, the stock price behaved almost exactly as per expectations. The stock rallied briefly by rising above the 48 level and its three EMAs to touch an intra-day high of 56.80 on Apr 7 ‘11. After a drop to its 20 day EMA, the stock rose again to touch an intra-day high of 56.55 on Apr 21 ‘11. A volume spurt may have indicated a continuation of the rally, but it turned out to be a double-top pattern.

The stock resumed its down trend, and dropped to an intra-day low of 35.50 on Aug 26 ‘11 – just short of the downside target of 34. Note that stock prices tend to fall short of downside targets in bear markets and overshoot upside targets in bull markets.

The 18 months daily bar chart pattern of JK Lakshmi Cement formed an interesting ‘W’ shaped double-bottom reversal pattern by rallying up to the 48 level and then dropping to a slightly higher bottom of 36.60 on Dec 29 ‘11.

The subsequent rally coincided with the rally in the broader market. A huge volume spurt propelled the stock’s price well above the 48 level in Feb ‘12. It is very unlikely that the price will fall below 48 in a hurry. Instead of sliding down from its Feb ‘12 top – like the indices and most stocks – the stock entered into a sideways rectangular consolidation pattern.

Rectangular consolidation patterns tend to be continuation patterns, which means the stock price was expected to resume its up trend after the break out from the rectangle. A high volume spike validated the break out earlier this month, and took the stock price to an intra-day high of 83 on Jul 4 ‘12.

After consolidating within a small symmetrical triangle pattern, the stock price has broken out upwards on another volume spurt. But this time, the bulls may have overplayed their hand. Note that all four technical indicators touched much lower tops as the stock price touched a new intra-day high of 86.60 today (Jul 26 ‘12). The combined negative divergences should lead to a correction or consolidation at any time.

All three EMAs are rising and the stock is trading above them – a clear sign of a bull market. However, both the stock price and its 20 day EMA have moved too far above the 200 day EMA. Such a condition usually precedes a correction or consolidation.

Technical indicators are bullish, but showing weakening signs. MACD is positive, entangled with its signal line and moving sideways. ROC is touching its 10 day MA in positive territory, after briefly entering its negative zone. RSI has dropped from its overbought zone, but is above its 50% level. Slow stochastic has re-entered its overbought zone.

Cement is not my favourite sector because it is very capital intensive, and cyclical and seasonal price behaviour makes it an ‘avoid’ for most small investors. But what I like about this company is its steadfast resolve in expanding capacities even during down turns. A share buy-back is ongoing.

Bottomline? The stock chart pattern of JK Lakshmi Cement formed a double-bottom reversal pattern that ended a 2 years long bear market. The stock has not only re-entered a bull market, but has recovered its entire capital loss in seven months. Add on dips – provided you are nimble enough to get out before the cement cycle turns down again.

Stock Chart Pattern - JK Lakshmi Cement (An Update)

The prior update to the analysis of the stock chart pattern of JK Lakshmi Cement was posted 10 months back. The stock had touched a post-split high of 85 in Jan ‘10 followed by a quick drop to the support level of 64. The upward bounce from the support reached a high of 81 in Mar ‘10. Failure to test the previous high was the first warning of a trend change.

It is quite interesting to look back after some time to check what had been advised earlier:

‘…all may not be well with the cement sector. If you hold the stock, get out at the earliest. A drop below 64 can take the stock to 58. On a break below 58, it can go to 48 and 34. New entrants should wait for the correction to play out.’

The one year bar chart pattern of JK Lakshmi Cement below shows that my advice was spot-on:

Though the stock was seeking support from the 64 level back in May ‘10, it had already slipped below its 200 day EMA, and the technical indicators were very bearish. That is why I had advised investors to sell. By the 3rd week of May ‘10, the stock dropped into the support zone between 58-64 and traded sideways till end-Jun ‘10. The ‘death cross’ (marked by the blue oval) on Jun 24 ‘10 confirmed a bear market.

Note that while the stock was drifting down below the 200 day EMA during May-Jun ‘10, all the four technical indicators were moving up, making higher tops and higher bottoms. The positive divergences were signalling a possible rally.

On Jul 1 ‘10, the stock had a sharp move above the support zone and the entangled 50 day and 200 day EMAs – but soon drifted down to the 64 level. On Jul 19 ‘10, another sharp up move on a volume spike took the stock above its entangled 50 day and 200 day EMAs – but it turned out to be a well-laid trap for the bulls.

This time, the stock swiftly dropped below the 64 level and reached the lower edge of the support zone at 58. By end-Jul ‘10, the 50 day EMA finally dropped below the 200 day EMA though it remained close to the long-term average till Nov ‘10, as the stock price oscillated around the 64 level.

On Nov 18 ‘10, the stock closed below the 58 level, and after a few days of struggle to hang on, dropped swiftly down to the next lower target of 48. A sharp upward bounce found resistance from the 58 level – clearly demonstrating how broken support levels turn into resistance levels.

A brief rally in Dec ‘10 took the stock above its falling 50 day EMA and there were two closes above the 58 level in early Jan ‘11. But the stock price failed to test the falling 200 day EMA, and the subsequent down move broke the support of the 48 level and reached a new low of 40.50 on Feb 11 ‘11.

Not surprisingly, the upward bounce found resistance from the 48 level. The stock is likely to test its recent low and move down further to the next target of 34. Note that though the stock made a new low, the ROC reached a higher low and the RSI didn’t move lower. The positive divergences can lead to a rally that may take the stock price above the 48 level.

But bulls shouldn’t get too excited. The technical indicators are hinting at only a mild rally. The MACD is above the signal line, and both are moving up – but both remain in negative territory. The ROC is also negative, and below its 10 day MA. The RSI failed to reach its overbought zone and is dropping to the 50% level. The slow stochastic touched its overbought zone, only to turn back and fall below the 50% level.

Bottomline? The stock chart pattern of JK Lakshmi Cement doesn’t appear to have found a bottom yet. Q3 results were disastrous – a 10% drop in top line on a YoY basis but a whopping 90% shrinkage of the bottom line. Avoid for now, but keep it on the watch list.

Stock Chart Pattern - JK Lakshmi Cement (An Update)

My previous analysis of the stock chart pattern of JK Lakshmi Cement was back in July '09. In Dec '09, the stock was split in a 1:2 ratio. So price levels discussed earlier needs to be divided by 2 for comparison with the current chart.

The stock chart had made a nice rounding bottom bullish pattern and gained an impressive 230% in 3 months from a low of 17.50 (then 35) in Mar '09 to 58 (then 116) in Jun '09. The stock was in the midst of a sideways consolidation, with contradictory signals emanating from the technical indicators.

The cement sector is not my favourite - a typical cyclical commodity sector with too many players, leading to low margins. What I liked about JK Lakshmi Cement was its strong balance sheet and commitment towards cost reduction through backward integration. I had suggested that investors could buy the stock on a break-out above 58 (then 116).

Let us take a look at the 1 year bar chart pattern of JK Lakshmi Cement to find out how the stock has fared in the last 10 months:

The sideways consolidation in Jun-Jul '09 lasted about 6 weeks followed by a high volume break-out that took the stock to 64. Thereafter, the stock consolidated sideways again, with the 64 level providing good support. Occasional upward spikes on high volumes gradually took the stock higher till it hit 74 on Oct 1 '09.

A three months long consolidation followed, during which the stock fell below the 64 level. That became a resistance level for a month, till the stock moved up again. Following the stock split, there was a sharp up move on good volumes and the stock hit a high of 85 on Jan 19 '10 before running out of breath.

Note that the initial sharp gain of 230% (17.50 to 58) took only 3 months. The next leg, from 58 to 85 - a gain of 46.5% - took 7 months. Overall, the stock gained 385% from its Mar '09 low -  outperforming the Sensex by a big margin.

The correction from Jan '10 coincided with the overall Sensex correction, but as is often the case with small-cap stocks, it started to underperform the Sensex on the way down. After dropping quickly to 63, it bounced up again but failed to test the previous top.

A sideways consolidation on diminishing volumes continued for 3 months. The stock eventually broke down below the consolidation zone and is now desperately seeking support from the long-term support-resistance level of 64.

The chart pattern shows several notable examples of technical analysis theory. The first one concerns break-outs and break-downs from consolidation zones. Break-outs require high volume support. Break-downs do not.

Next, a consolidation pattern is usually a continuation pattern. That means the trend before entering the consolidation pattern continues. From Jun '09 till Dec '09, all the consolidation patterns ended with an upward break-out on good volumes.

The trend before the consolidation pattern from Feb-Apr '10 was sharply downwards. The break-down from the pattern was therefore logical.

Third, and this is important for investors, bull phases tend to last a lot longer than bear phases. Note that the time taken for the stock to move up from 64 to 85 was almost 6 months (Jul 21 '09 to Jan 19 '10). All the gains got wiped out in the drop from 85 to 63 in just 8 trading sessions.

Such a sharp correction is usually followed by an equally sharp pullback, that provides a good selling opportunity. Very few investors can pick the exact tops or bottoms.

All the technical indicators have turned extremely bearish. The MACD is falling in negative territory. Both the RSI and slow stochastic are deep inside their oversold zones. The stock is below its 200 day EMA (currently at 67 - not shown in chart).

Bottomline? The stock chart pattern of JK Lakshmi Cement shows that all may not be well with the cement sector. If you hold the stock, get out at the earliest. A drop below 64 can take the stock to 58. On a break below 58, it can go to 48 and 34. New entrants should wait for the correction to play out.

Stock Chart Pattern - JK Lakshmi Cement

The stock chart pattern of JK Lakshmi Cement shows that it is one of those resilient stocks that are not too bothered by the gyrations of the BSE Sensex index.

The cement sector has not been a great favourite of mine. The large investments needed for expansion, frequent swings between shortages and over-supply, too many units of various sizes, regional market domination by different players, had all contributed to low margins for this cyclical sector.

The national highway project caused a sea change in the prospects of the cement industry. Coupled with the growth of the infrastructure and construction sectors led to a boom period for the industry. From a loss-making company at the beginning of this decade, JK Lakshmi Cement has turned around to become one of the smaller but stronger players.

What I like most about the company is its continuous efforts at cost reduction by building a captive power plant, a waste heat recovery system, and switching between different fuel inputs that increased profitability and generated a ton of positive cash flow from operations.

More details about the company can be found from this article. An analysis of the one year bar chart patter of the JK Lakshmi Cement stock follows:-

The stock made a rounding bottom pattern before starting its rally a little ahead of the Sensex. From a low of 35 on Mar 3, '09 it hit a high of 116 on Jun 3, '09 - a rise of 230% in 3 months.

The BSE Sensex index made a huge upward gap on May 18, '09 and then went on to form a head-and-shoulders pattern. No such gap is there in the chart above, because the stock had already moved up on high volumes on May 14 and may 15, '09.

After hitting the Jun '09 high, the stock has entered a sideways consolidation between the levels of 95 and 116, with good support from the 20 day EMA, and correcting only 26% of the up move. The Sensex corrected 31.5% of its rise from 8047 to 15600.

The RSI and slow stochastic have both moved above the 50% levels. In the process, they have made higher bottoms while the stock remained flat. This positive divergence may lead to a further up move. The OBV is tracking the stock with a slight upward bias. But the MACD is below its signal line and moving down - a negative divergence.

Contradicting signals from technical indicators are not unusual when the stock chart pattern is consolidating. A breakout can go either way. This is what makes technical analysis so exasperating some times!

Bottomline? The stock chart pattern of JK Lakshmi Cement makes it a good candidate for investment. Wait for a breakout above 116 to add. On a break down below 95, await the down move to play out before entering.