Technical updates – Thermax and Voltas

There has been considerable change in the fortunes of Thermax and Voltas since the previous technical update.

Slow economic growth and poor credit off-take had taken a toll on the capital goods sector. Just when things were beginning to look up, demonetisation of Rs 500 and Rs 1000 notes put a spanner in the works.

Notwithstanding strong protests and predictions of dire consequences by opposition parties, economic recovery from demonetisation has been surprisingly better than expected. The effect is clearly visible on the charts of Thermax and Voltas.

Thermax

The stock had hit a high of 1294 in Mar '15 but daily technical indicators formed various reversal patterns inside their overbought zones. That triggered a long bear phase that touched a low of 707 in May '16.

A technical bounce into bull territory was followed by formation of a 'double top' reversal pattern and a correction below all three EMAs. The stock touched a higher bottom of 742 in Jan '17 - forming a 'double bottom' reversal pattern that has propelled the stock back into bull territory.

Daily technical indicators are correcting overbought conditions. The dip can be used to add.

Voltas

After undergoing a strong corrective move from a high of 358 in Jun '15 to a low of 222 in Feb '16, the stock formed an 'inverse head and shoulder' like pattern that triggered a strong bull rally.

The stock rose to touch a high of 402 in Oct '16, but all four technical indicators touched lower tops. The combined negative divergences led to a sharp correction below all three EMAs to a low of 293.

Oversold technical indicators signalled the beginning of another strong rally that took the stock to a new high of 419 on Apr 20 '17.

The stock is in a strong bull grip despite periodic sharp corrections. Dips can be used to add.

Technical updates – Thermax and Voltas

India’s GDP growth has been shrinking for the past several quarters due to a combination of poor governance, rampant corruption, faulty populist policies and burgeoning fiscal and current account deficits.

High inflation kept interest rates high, which in turn led to lower capital expenditure that stunted growth. Not surprisingly, infrastructure stocks had borne the brunt of the negative sentiment about the economy.

Some belated measures introduced by the Finance Minister have aided in curtailing deficit. FII inflows have helped the Rupee to appreciate in value. The stock market appears to have discounted the good news in advance – the charts of Thermax and Voltas are good examples.

Thermax

The stock price of Thermax formed a small ‘double bottom’ reversal pattern back in Dec ‘11 and started an up trend that is still in force. Note the 14 months long consolidation within a ‘rectangle’ pattern. Rectangles tend to be continuation patterns. The eventual break out was upwards, but was followed by a strong pullback that found support from the rising 200 day EMA.

A sharp rally followed. All four technical indicators indicated overbought conditions. The stock nearly doubled in price from its Dec ‘11 low of 390, but formed a small ‘double top’ reversal pattern. After correcting down to its rising 50 day EMA, the stock bounced up in trade today.

Voltas

The stock price of Voltas formed a small inverse head-and-shoulders reversal pattern back in Dec ‘11 and started to rally. It formed a large ‘double-top’ reversal pattern by touching the 130 level in Mar ‘12 and Sep ‘12. A year-long down trend followed and the stock touched a new low of 64 on Sep 3 ‘13.

A strong rally helped the stock touch a 2 yr high of 163 on Apr 2 ‘14 – a huge gain of 157% in 7 months. The stock is looking overbought. Three of the indicators – ROC, RSI, Slow stochastic – are showing negative divergences by touching lower tops. A correction is likely.

Stock Chart Pattern - Thermax Ltd. (An Update)

The concluding remarks in the previous technical update  to the stock chart pattern of Thermax Ltd., posted on Nov 30 ‘11 (marked by grey vertical line on chart below) were: “The bear market isn’t over. No need to buy in a hurry. But slowly accumulating the stock may be a good idea.”

Turns out that the recommendation was quite appropriate. About a month after that post, the stock price of Thermax Ltd. touched an intra-day 52 week low below the 400 level (along with the broader market), formed a small double-bottom reversal pattern, and started on an up trend that is ongoing.

The stock price rose to touch an intra-day high of 568.65 on Feb 21 ‘12, but all four technical indictors touched lower tops (marked by blue arrows). The combined negative divergences warned of the correction that followed.

The opposite happened when the stock dropped to an intra-day low of 401.60 on May 15 ‘12. All four technical indicators touched higher bottoms (marked by blue arrows). The positive divergences signalled that the correction was over.

Note that the stock price touched progressively higher tops during Oct ‘12 and Dec ‘12, but all four technical indicators touched progressively lower tops that hinted at a possible correction that is going on now.

Such divergences are not always visible on charts, and the extent of the subsequent down or up move can not be ascertained, but when all four indicators are showing divergences then one should heed the signal and take appropriate buy/sell decisions.

The stock has been trading within an upward-sloping channel for more than a year now. Resistance from the upper boundary of the channel has been fairly strong for two reasons: Traders who follow technical analysis have obviously used the proximity to the top of the channel to sell.

The other reason is a long-term support/resistance zone between 650 and 700 (mentioned in the previous update). Observant readers may note that the price breakdown below 650 during Apr-May ‘11 (shown on chart in previous update) was accompanied by a spurt in volumes.

Upward break outs above resistance levels require stronger volumes for technical validity, but downward breaks of support levels need not be accompanied by strong volumes.

However, when a downward break of a support level is accompanied by a volume spurt, it usually means that the support level (of 650 in this case) will turn into a strong resistance to future up moves. The stock price of Thermax Ltd. touched a peak of 639.90 on Dec 3 ‘12 – above the upper edge of the parallel channel – before retreating.

Daily technical indicators appear to be recovering from oversold conditions, though MACD and ROC are still negative, and both RSI and slow stochastic are below their 50% levels. This may be a good time to start accumulating the stock from the technical point of view.

Fundamentally, headwinds are still strong – as for most companies in the capital goods sector. Q3 (Dec ‘12) results showed slippage in top and bottom lines, though order intake is improving.

Bottomline? The stock chart pattern of Thermax Ltd has returned to a bull market, but is nowhere near its glory days. Patient long-term investors would do well to start accumulating the stock. Short-term players looking for quick profits should look elsewhere.

Stock Chart Pattern - Thermax Ltd. (An Update)

A little more than a year back, I had written a technical analysis of the stock chart pattern of Thermax Ltd. The stock had closed at 900 after touching an intra-day high of 927 (a little below its Oct ‘07 top of 968).

The technical indicators were looking quite overbought. The stock was trading at a TTM P/E of more than 50. A correction had looked imminent, and I had suggested that existing holders could book partial profits. Fundamentally strong stocks can get overpriced due to prevailing market sentiments. One of my concluding comments is worth repeating:

“The ability to discern and interpret technical analysis signals enable good entry/exit points for optimising returns.”

Going through reader comments on the earlier post is quite interesting, and provides some insights into the minds of small investors (despite the very small sample size). Buying and selling stocks is not as simple as opening a demat account and giving instructions to your broker. It requires a fair amount of skill if you want to get it right – and the one year bar chart pattern of Thermax Ltd. is a good example of that:

(The vertical line in Nov ‘10 indicates the day I had written my previous post on Thermax.)

I had no clue that the stock will start falling from the very next day after I wrote the earlier post, but if you note the state of the technical indicators, you will see that all four were looking overbought. The MACD was positive and well above its signal line. The ROC was also positive and well above its 10 day MA. Both the RSI and the slow stochastic were well inside their overbought zones. The technical set-up was of a ‘perfect storm’.

What one doesn’t know in advance is the extent of the subsequent correction. It could be a 10-15% correction, or it could lead to a change of trend and a huge fall. A trend change doesn’t occur over a couple of days. Typically, some sort of a reversal pattern will get formed over a few weeks or months. In the chart above, the stock formed a rare triple-top reversal pattern over two months – touching 927 on Nov 4 ‘10, 913 on Nov 25 ‘10 and 907 on Jan 4 ‘11.

What should have been the strategy of an investor who booked partial profits on Nov 5 ‘10 at say, Rs 900? The zone between 650 and 700 had acted as a support-resistance zone on the way up. So, it should have acted as a support-resistance zone on the way down. Did it?

Note that the stock fell right through the zone - after hesitating a bit during late Jan ‘11 and early Feb ‘11 – to a low of 577 on Feb 10 ‘11. The ‘death cross’ of the 50 day EMA below the 200 day EMA (marked by the light blue oval) confirmed a bear market. The technical indicators were looking oversold, but they can remain oversold for long periods some times. What happened next is interesting. The stock rose to the 650 level, faced resistance, and dropped to a new low of 543 on Feb 28 ‘11, but all four technical indicators touched higher bottoms.

The positive divergences gave a short-term buy signal. Why short-term? Because the stock was in a bear market, and counter-trend rallies are short and swift before they attract selling pressure. Note that the stock climbed up on a high volume spike to the 700 level on Apr 8 ‘11, failed to break through the dual resistance from the 700 level and the 200 day EMA, and has since been falling deeper into a bear market. All four technical indicators were looking overbought – clearly indicating a selling opportunity.

At its recent intra-day low of 407 touched on Oct 5 ‘11, the stock corrected 56% from its Nov 4 ‘11 peak. All four technical indicators looked oversold – hinting at another short-term rally. The market rally during Oct ‘11 helped the stock to climb above its falling 20 day and 50 day EMAs to a high of 503 on Nov 4 ‘11. This time, the overbought technical indicators signalled that the rally was over. The stock remains in a firm bear grip, and all rallies are being used to sell.

Q2 results were reasonably good. Top line increased by 19.4% on a YoY basis; bottom line rose by 13.6%. On a TTM EPS of 34.26, the stock is trading at a P/E of 13.3. But the negative sentiment in the capital goods sector may keep the stock’s price under pressure.

Bottomline? The stock chart pattern of Thermax Ltd has been in a bear grip for more than a year, and there doesn’t seem to be any respite in sight. But the company is fundamentally strong, well managed with negligible debt on its books. Just the kind that small investors should think about adding to their portfolio. The bear market isn’t over. No need to buy in a hurry. But slowly accumulating the stock may be a good idea.

Stock Chart Pattern - Thermax Ltd. (An Update)

The stock chart pattern of Thermax was last analysed at the beginning of the year when it was struggling to go past 650. That was the 61.8% Fibonacci retracement level of its massive bear market fall from a peak of 968 in Oct ‘07 to a trough of 151 in Dec ‘08.

The spectacular 500 points rise from the low got the stock back into a bull market but the technical indicators were showing negative divergences. I had advised existing holders to book partial profits, and new entrants to wait for a likely correction to enter – as the 650-700 zone was a long-term support/resistance level.

Let us take a look at the one year bar chart pattern of Thermax Ltd to find out if my advice proved useful for investors:

As it turns out, it did – for those who heeded it. Shortly after I posted the previous analysis, the stock broke out above the 650 level on strong volumes – only to face overhead resistance from the 700 level. On Jan 21 ‘10, the stock touched a new high of 745, but it turned out to be a high volume ‘reversal day’ (higher high, lower close).

The month-long correction that followed took the stock below both its 20 day and 50 day EMAs. After a drop of nearly 25% – from 745 to 560 – the stock found support at its previous low, formed another high-volume ‘reversal day’ pattern (lower low, higher close) and moved up sharply to touch the 700 level once more.

The entire month of Mar ‘10 was spent in consolidating within the 650-700 zone. In Apr ‘10, the stock managed to move above the 700 level, which turned into a support level. After reaching a new high of 750 on Apr 23 ‘10, the stock again corrected down to the 650 level and spent May ‘10 consolidating within the 650-700 zone.

In Jun ‘10, the stock finally moved above the 700 level, and this time there was no turning back. The rising 50 day EMA provided good support to the upward journey. A new high of 850 was touched on Jul 26 ‘10 – which again was a ‘reversal day’ but on tepid volumes.

The next three months were spent in another sideways consolidation between 750 and 850. A high-volume break out on Oct 28 ‘10 took the stock above the consolidation range, and the subsequent sharp rally ended the year with a high of 927 and a close bang on the 900 level.

Both fundamentally and technically, the stock is looking overbought and ripe for a correction. On a trailing twelve month (TTM) basis, the stock is trading at a high P/E of 54.6. The loss in the Mar ‘10 quarter is partly responsible for the lower TTM EPS. The excellent Q2 ‘10 results are the probable cause of the recent price spike.

The MFI, RSI and slow stochastic have all entered their overbought zones. The MACD has moved sharply above the signal line. While technical indicators can remain overbought for a while, a correction or consolidation is likely to follow soon.

Bottomline? The stock chart pattern of Thermax Ltd exemplifies the benefit of choosing a fundamentally strong stock and patiently holding it for the long-term. The ability to discern and interpret technical analysis signals enable good entry/exit points for optimising returns. The stock has been a six-bagger from its Dec ‘08 low. Existing holders can book partial profits, if they wish. New entrants should wait for a 15-20% correction.

Stock Chart Pattern - Thermax Ltd.

The one year bar chart pattern of Thermax Ltd. shows a sharp rise between Mar '09 and May '09, followed by a steady rise that took the stock from a low of 151 in Mar '09 to the recent high of 650 in Nov '09 - a spectacular 330% rise for this mid-cap energy and environment company.

The stock had made a high of 968 back in Oct '07 from where it fell steeply by 84% to the low of 151 in Dec '08. The impressive rise during the year has retraced 61.1% of the entire bear market fall.

It is quite interesting how the Fibonacci retracement level of 61.8% (656 in this case) has proved to be a strong resistance level for the Thermax Ltd. stock. There has been four attempts in the last 2 months to cross the level, and each time the bears managed to stop the bull rampage.

That is not the only point of concern. In the 2 year charts, there is a resistance zone between 650-700 that the stock needs to cross decisively. The negative divergences in the MACD and RSI are also evident. The stock has been correcting soon after the RSI entered the overbought zone (which it is about to do again).

The stock has received good support from the 50 day EMA during recent corrections, and there is no reason to believe that any correction will be deeper. In case the stock corrects more, the zone between the 450 level and the 200 day EMA should provide stronger support.

All three EMAs are rising and the stock is above them. The OBV is also rising, indicating buying support. There is also a bullish 'ascending triangle' pattern forming. So the bull rally in the Thermax Ltd. stock is under no great threat.

A fundamentally strong, debt-free, regular dividend payer with positive cash flows from operations that has funded its expansion activities mostly from internal accruals - just the kind of well-managed company that should adorn the portfolio of long-term investors.

The company offers products and services in the field of power generation, environment protection and water management - all areas currently fancied by investors. No wonder this Rs 2 face-value stock is trading at a high P/E of 26.5 at today's closing price of 640.

Bottomline? The stock chart pattern of Thermax Ltd. shows that the bulls are in control. The time to add this stock was during Mar-Apr '09. New entrants should wait for a decent correction, as valuations are looking a bit stretched. Existing holders can book partial profits, but should stay invested.

(Thanks to readers 'VJ' and 'The Visitor' for suggesting this stock.)