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 – Voltas Ltd (an update)

In the previous technical update (in Feb ‘11) of the chart pattern of Voltas Ltd., the ‘death cross’ of the 50 day EMA below the 200 day EMA had confirmed a bear market. The technical indicators were looking bearish, and the following observations were made:

“The stock may fall to its support zone of 145-150. If the support doesn’t hold, a drop to 100 is possible. Voltas remains a good stock fundamentally, and lower levels mentioned could be good entry points.”

The daily closing chart pattern of Voltas Ltd. shows how long-term support-resistance levels come into play:

The stock dropped to the support level of 150 in Mar ‘11 about a month after the previous update was posted. Note that the stock touched a lower bottom than the one in Feb ‘11, but all four technical indicators touched higher bottoms. The effect of the combined divergences led to an upward bounce that crossed above the falling 20 day and 50 day EMAs to 186 (in Apr ‘11), but failed to reach the falling 200 day EMA.

That was another warning to exit the stock, because the bears were too strong to allow a trend reversal despite the positive divergences. The stock price twice sought support from the 150 level in May ‘11 and Jun ‘11 and bounced up, only to break downwards in Jul ‘11.

The stock hesitated at the next support level of 100 in Oct ‘11, but again broke downwards in Nov ‘11. A small inverse head-and shoulders reversal pattern formed during Dec ‘11 and Jan ‘12, with the stock price touching a closing low of 72.65 on Dec 29 ‘11 – correcting almost 72% from the double-top reversal of the bull rally in Nov-Dec ‘10.

The rally from the bottom of 72.65 coincided with the rally in the broader market, but instead of peaking out in Feb ‘12 after crossing above the 100 level, the stock price rose briefly above its 200 day EMA to 129.80 on Mar 13 ‘12. A consolidation within a ‘descending triangle’ pattern followed. The expected downward break occurred today as the stock price fell below the triangle and the 100 level to close at 98.85. Can the stock price fall much lower?

The bearish technical indicators seem to suggest a likely test of its Dec ‘11 low. The MACD is falling below its signal line in negative territory. The ROC is negative and falling below its 10 day MA. It has touched a higher bottom, which may cause a brief upward bounce. The RSI and the slow stochastic are both sliding below their 50% levels. There is a small support zone between 92 and 95, which may try to halt the fall.

What ails the company? Like most other stocks that are involved with infrastructure projects, Voltas has lost favour with the investing community. Severe competition in India and West Asia has squeezed margins. Debt has tripled, though the debt/equity ratio remains low. The company took a huge Rs 280 Crores hit in Q3 due to delayed execution of a hospital project in Qatar. The good news is that it was a one-time hit, and the order book has been increasing of late.

Bottomline? The stock chart pattern of Voltas Ltd. is back in a strong bear grip technically, but the fundamentals appear to be improving. Patient and long-term investors may keep a close watch on this company from the Tata group. The adventurous may enter on the current dip, but with a strict stop-loss at 71. Alternatively, wait for the audited full year results and a convincing break out above 130 to enter.

A Tale of Two Charts – Voltas and Punj Lloyd

Why write about these two charts? They are like chalk and cheese. One a boring stalwart from the house of Tata that doesn’t get a passing glance from small investors. The other a darling of the previous bull market that was hailed as the ‘next L&T’, and found a place in the portfolio of many small investors.

Back on Mar 24 ‘10, I had posted an update on the stock chart pattern of Voltas Ltd. The stock had touched a high of 190 in Jan ‘10, only to correct down to the long-term support zone between 145-150 before moving up to 177. The technical indicators were looking bullish, but valuations were a bit stretched. This is what I had recommended to my readers:

‘Existing holders can place a stop-loss at 150 and remain long. New entrants can use any dips to the 150 level to enter... Those who are stuck in debt-ridden, operating cash flow negative stocks, like Punj Lloyd, can make a switch.’

That last sentence motivated me to compare the two charts, when I decided it was time to write another update on the stock chart pattern of Voltas Ltd. Here are the one year bar chart patterns of Voltas and Punj Lloyd.

Voltas

The closing price of Voltas on Mar 23 ‘10 – marked with the blue arrow – was 177.60. The stock was in the middle of its bull rally. After testing the support from its rising 200 day EMA in May ‘10 – when it dropped to an intra-day low of 157 – the stock continued its bullish pattern of higher tops and higher bottoms. It finally reached a high of 262.50 in Nov ‘10, falling short of its high of 267 touched in Dec ‘07.

The first leg of the correction found support above the rising 100 day EMA. The stock moved up to test its previous high, fell just short at 260 and formed a bearish double top pattern that gave a signal to book profits. The subsequent correction has been exacerbated by the not-so-great Q3 results (profits were lower both on YoY and QoQ basis).

The stock dropped to an intra-day low of 159 on Feb 9 ‘11 – close to its May ‘10 low of 157 - correcting almost 40% from its Nov ‘10 peak. The ‘death cross’ of the 50 day EMA below the 200 day EMA (marked by a blue oval) confirms a bear market. Note that the pullback rally of the past few sessions has found resistance from the falling 20 day EMA.

All four technical indicators are bearish. The stock may fall to its support zone of 145-150. If the support doesn’t hold, a drop to 100 is possible. Voltas remains a good stock fundamentally, and lower levels mentioned could be good entry points.

If any investor had listened to my advice and switched from Punj Lloyd, but failed to book profit in Nov ‘10 or Dec ‘10, today’s (Feb 16 ‘11) closing price of 177.20 means he has still not made a loss. What if some one had hung on to Punj Lloyd or, horror of horrors, bought more thinking that the down side was limited? See for yourself.

Punj Lloyd

The stock’s bull rally had peaked out at 276 in Oct ‘09. Within the space of the next 8 trading sessions, the stock dropped below its 200 day EMA after the bad news of its UK project delays and resulting penalty hit the markets. The stock was already five months into a bear market. Its closing price on Mar 23 ‘10 – marked with the blue arrow – was 177.35, prompting me to recommend the switch to Voltas.

Punj Lloyd continued in its bear market, making lower tops and lower bottoms – except for a brief attempt at revival during Sep and Oct ‘10. The bears snuffed out all bullish hopes before the stock could touch its falling 200 day EMA from below. Disastrous Q3 results (a loss at the net level) caused heavy selling.

The stock has fallen 73% from its Oct ‘09 peak, and can fall much lower. The huge debt burden coupled with severely negative cash flows from operations is a killer cocktail. If you are still invested in this stock, ask yourself: Why?

Bottomline? Comparing the stock chart patterns of Voltas Ltd and Punj Lloyd exemplifies Benjamin Graham’s statement: In the short-term the market acts like a voting machine, but in the long-term it is a weighing machine.

Stock Chart Pattern - Voltas Ltd (An Update)

My previous look at the stock chart pattern of Voltas Ltd was back in June 2009. The stock of this fundamentally strong infrastructure company from the Tata group had a one way ride from the low of 31 in Mar '09 to a high of 146 in Jun '09 and was pausing to catch its breath at 122.

The technical indicators were hinting at a further correction down to the 90-100 zone, which could have provided a decent entry point for new investors who had missed the first part of the rally. It is time for an update, so let us have a look at the 1 year bar chart pattern of Voltas Ltd:-

The very next day (Jun 18 '09) after I wrote about the stock, it dropped to a low of 107, recovered and then tested the low by falling again to 109 on Jul 6 '09. That is the lowest price it has seen since, as it steadily moved up to make a high of 190 on Jan 20 '10.

A sharp correction took the stock down to the 150 mark, where it received strong support from a long-term support-resistance zone (145-150). A couple more tests of the support was followed by a sideways consolidation from which it has broken out upwards this week to touch a high of 180.

The 20 day EMA has moved above the 50 day EMA after spending a few days below it. The 200 day EMA is moving up nicely. The OBV remained pretty flat during the recent correction. The MACD has re-entered positive territory and is above the signal line. The RSI is rising above the 50% level. The technical indicators are hinting at a test of the recent high.

In the longer term 3 years chart, the stock made a mountain-like pattern from which most small and mid-cap stocks face a tough time in recovering:-

From the high of 267 made in Dec '07, the stock dropped a massive 88% to the low of 31 in Mar '09. The subsequent recovery to 190 in Jan '10 has already retraced 67% of the entire bear market fall.

The 61.8% Fibonacci retracement level of the entire bear market fall is at 146. Isn't it amazing that the stock had reacted exactly from this level back in June '09, and failed to clear that level convincingly till Aug 25 '09? No wonder in technical parlance the 0.618 ratio is some times called the 'golden ratio'.

Valuation wise the current stock price does not leave much in terms of 'margin of safety'. The Dec '09 quarterly result was nothing to write home about - both sales and profits were down quarter-on-quarter. But this conservatively managed company will surely return back to the growth path in the near future.

Bottomline? The stock chart pattern of Voltas Ltd is showing resilience at the 150 level. Existing holders can place a stop-loss at 150 and remain long. New entrants can use any dips to the 150 level to enter, with a tighter stop-loss. Those who are stuck in debt-ridden, operating cash flow negative stocks, like Punj Lloyd, can make a switch.

Stock Chart Pattern - Voltas Ltd

The stock chart pattern of Voltas Ltd is based on strong fundamental foundations. Like many companies of the Tata group, Voltas has market leadership in its chosen area of manufacturing.

It produces solid, long-lasting goods and manages its finances conservatively. Steady growth in earnings, regular dividends, substantial order-book and a comfortable cushion of cash - just the kind of company I like.

Let us have a look at the 1 year bar chart pattern of Voltas Ltd:-

Voltas made a 'V' shaped bottom after hitting a low of Rs 31 on Mar 5, '09. On a rapid pick-up in volume, the stock surged to Rs 146 on Jun 10, '09. It encountered strong resistance at the 145-150 zone and has corrected down to seek support at its 20 day EMA.

A quick look at the technicals. The OBV is tracking the correction by moving down. The MACD is in positive territory but has moved below its signal line. The RSI has slipped below the overbought zone. The slow stochastic has done likewise, with the %K below the %D line. All the indicators point to a further drop in price.

The massive rise of 370% in 3 months was unsustainable and the correction should help the stock shed some weight for its next up move. Wait for the correction to play out. Meanwhile, you can do your research and read a detailed fundamental study of Voltas Ltd in this article.

Bottomline? A 38.2% or 50% Fibonacci retracement of the entire rise means a possible drop to the 90-100 zone. That would take the Voltas chart pattern near its 50 day EMA - a good entry opportunity for new investors. Existing investors should continue to hold.