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.