Technical updates – Gayatri Projects and IRB Infrastructure

With the economy showing signs of settling down after absorbing the double-whammy of demonetisation and GST implementation, focus of investors and analysts is shifting towards the neglected infrastructure sector once again.

Fortunes of shareholders of two companies from the construction sector - Gayatri Projects and IRB Infrastructure - have taken divergent paths. The stock of Gayatri Projects has gained 47% in the past two years, while the stock of IRB Infra has lost 7%.

On the financial front, Gayatri Projects has a debt/equity ratio of 2.22 and its financial expenses are 200% higher than its net profit. IRB Infra has a lower debt/equity ratio of 1.23 and its financial expenses are 50% higher than its net profit.

Gayatri Projects is trading at a P/E of 9.2. IRB Infra is trading at a four times higher P/E of 39.9. 

Gayatri Projects

The closing stock price of Gayatri Projects formed a 'triple bottom' reversal pattern below its three EMAs during Feb '16 and May '16. That triggered a price recovery that faced strong resistance from its Nov '15 top of 151.50.

A breakout with good volume support above 151.50 on Apr 17 '17 failed to sustain above the resistance level. Another breakout on Jun 5 '17 managed to keep the stock price above the resistance level, which was subsequently tested on Jul 5 '17 and Aug 10 '17 and turned into a support level.

The stock rose to touch a new high of 201.75 on Nov 16 '17 (note that the stock's face value was split from Rs 10 to Rs 2 in Feb '17). Daily technical indicators are looking bullish but showing negative divergences by failing to touch new highs with the stock's price.

Some correction or consolidation may occur. For the past two months, bulls are buying every dip, so corrections have been shallow.

IRB Infrastructure

The closing stock price chart of IRB Infrastructure has frustrated long-term investors but given plenty of opportunities to short-term traders. The chart shows three bearish phases and three bullish phases during the past two years.

Light blue ovals have marked every crossing of the 50 day EMA below (death cross) or above (golden cross) the 200 day EMA. The 200 day EMA itself has meandered sideways for the past two years - giving no advantage to bulls or bears.

Daily technical indicators are looking bearish after correcting overbought conditions. The stock price touched a higher bottom of 200.60 on Aug 10 '17, and may attempt to rise past its May 2 '17 top of 266.80.

(If you wish to enter either of these stocks, or any other stocks from the construction sector, you are on your own. The sector typically has high debt and uneven cash flows and profits.)

Technical updates – Gayatri Projects and IRB Infrastructure

Stocks from the construction sector have emerged from long bear phases in anticipation of growth in the economy that may lead to revival of stalled projects and awarding of new contracts. The ground reality hasn’t quite lived up to the expectations – though there are some signs of increasing construction activity.

Gayatri Projects and IRB Infrastructure are two companies from the construction sector that have similar looking chart patterns (below), but looks can deceive. While the former has gained a considerable 270% from its bear market low to its 2 years high, the latter has gained an even more impressive 365%.

On the valuations front, Gayatri has a debt/equity ratio of almost 2, and its financial expenses are three times more than its net profit. IRB’s debt/equity ratio is a more manageable 1.06 and its financial expenses are marginally less than its net profit. No wonder Gayatri is trading at a P/E of 9.4 while IRB is trading at a three times higher P/E of 29.3.

Does that make one a better buy than the other? Or, should both stocks be avoided? You tell me!

Gayatri Projects

The stock price of Gayatri Project went through a long ‘double bottom’ bear market reversal pattern formation that took 7 months to complete. The subsequent rally was sharp, and was supported by strong volumes that launched the stock into a bull market.

Such sharp rallies are difficult to sustain. All four technical indicators reached extremely overbought conditions that led to a correction and then a small ‘double top’ pattern with a higher second top. But none of the technical indicators touched a higher top. The combined negative divergences was followed by a sharp correction that bounced back before testing support from the rising 200 day EMA.

For the past 4 months, the stock price has been consolidation sideways within a triangle pattern from which the break out can occur in either direction. Technical indicators are in bearish zones, but the 200 day EMA is still rising and the stock is trading above it in a bull market.

IRB Infrastructure

The stock price of IRB Infra dropped to a bear market low of 54 on a sharp volume surge, which was a sign of selling exhaustion. A ‘V’ shaped recovery was followed by a drop to a higher bottom – forming a small ‘double bottom’ pattern that preceded a gradually rally.

The rally faced resistance from the 200 day EMA and dropped to a higher bottom that indicated the start of a bull phase. The next leg of the rally was sharp and accompanied by strong volumes. But overbought conditions and negative divergences (marked by blue arrows) in three of the four technical indicators led to a sideways consolidation within a ‘rectangle’ pattern.

The consolidation within the ‘rectangle’ has consumed more than 5 months. Since rectangles are usually continuation patterns, the eventual break out is likely to be upwards. But rectangles are unreliable patterns, so one needs to wait for the break out to initiate any buy/sell action. Technical indicators are in bearish zones. The consolidation is likely to continue for a while longer.

Stock Chart Pattern - IRB Infrastructure (An Update)

The previous update on the stock chart pattern of IRB Infrastructure was posted almost two years back. The stock appeared to have made a double-top at 280, which was much higher than the minimum target of 229 mentioned in a prior post, and readers were advised to book partial profits. Was it good advice?

A look at the two years bar chart pattern of IRB Infrastructure will reveal that the advice was timely, even though the stock did rise another 10% to touch an intra-day high of 313 on Aug 24 ‘10:

The stock did not form any discernible reversal pattern, except that it formed a ‘reversal day’ pattern (higher high, lower close) on the day it hit its peak of 313. Reversal day patterns typically mark the end of an intermediate rally (or correction), but some times they can form at bull market tops and bear market bottoms – giving a very small window of opportunity to buy/sell.

This is why partial profit booking should be done when targets are met on the upside. Likewise, slow accumulation should be started when downward targets are met. It is next to impossible to catch the exact tops and bottoms.

The stock price started to correct rapidly and dropped below the 200 day EMA in Oct ‘10. It attempted a bounce back above the long-term moving average, but faced resistance form the falling 50 day EMA. A sharp fall below the 200 level in Nov ‘10 coincided with the ‘death cross’ of the 50 day EMA below the 200 day EMA – confirming a bear market.

All up moves faced resistance from the falling 50 day EMA till the stock dropped to an intra-day low of 150 in Feb ‘11. This time, the up move managed to climb above all three EMAs, but failed to clear the 229 level. Interestingly, 229 happened to be the top touched in Aug ‘09 – and the minimum upside target mentioned in an earlier post in Jun ‘09.

The dark blue down trend line drawn through the tops at 313 and 229 ruled IRB Infrastructure’s chart pattern till it touched an intra-day low of 121 on Jan 3 ‘12 - a 61.3%drop from the peak of 313 – underperforming the Sensex by a huge margin. Such are the risks associated with mid-cap (and small-cap) stocks. They tend to outperform in bull markets and underperform in bear markets.

The ongoing rally from the Jan ‘12 low has risen more than 20%, crossed above all three EMAs and the down trend line. The first two of the four criteria of a bull market (mentioned in a recent post) have been met. The rising 20 day EMA has crossed above the rising 50 day EMA and is about to cross above the 200 day EMA.

The technical indicators are correcting from overbought conditions. The MACD is positive, but has changed direction and dropped on to its signal line. The ROC crossed below its 10 day MA and fell all the way down to the ‘0’ line before bouncing up a bit. Both the RSI and the slow stochastic have dropped from their overbought zones. Expect some consolidation and a possible pullback to the down trend line.

Bottomline? The stock chart pattern of IRB Infrastructure is poised to change trend and enter a bull market. Many mid and small-cap stocks are showing similar chart patterns – on the verge of re-entering bull markets, thanks to relentless FII buying. Use dips to enter, but with a strict stop-loss. Q3 result was so-so – flat net profits on a slight increase in turnover.

Stock Chart Pattern - IRB Infrastructure (An Update)

The stock chart pattern of IRB Infrastructure had made a classic bullish double-bottom pattern when I had taken a look at it in the beginning of June last year. Based on the double-bottom pattern, I had indicated a minimum target of 229.

It is time for an update. Let us have a look at the 9 months bar chart pattern of IRB Infrastructure:-

The stock hit 161 on Jun 5 '09 and immediately dropped to 125. That level provided good support and the stock resumed its upward climb on growing volumes, as indicated by the OBV.

The stock made a high of 227 on Aug 27 '09 - almost meeting the minimum target mentioned within a short span of 3 months - before going into a 5 weeks long sideways consolidation between 200 and 220.

It broke upwards on decent volumes on Oct 6 '09 and eventually went on to make a high of 280 on Nov 19 '09. A corrective move saw the stock make a low of 233 on Dec 18 '09. A high volume breakout on Jan 8 '10 saw the IRB stock make another high at 280 on Jan 14 '10.

The chart pattern thus formed a bearish 'double-top' and it is no wonder that the stock once again entered a corrective phase. If you had entered at lower levels, this would be a good time to book partial profits. The minimum downside target from the double-top is 186.

The bulls are still in control as the stock price is just above the 20 day and 50 day EMAs and well above the 200 day EMA. The MACD is barely positive. The RSI is slightly above the 50% level.

The company is apparently doing quite well and year-end Mar '10 should see a sharp increase in profits as road toll revenues from completed BOT projects start to kick in. High promoter holding and negligible public float could lead to wide price fluctuations.

Bottomline? The stock chart pattern of IRB Infrastructure is showing some tiredness after an excellent rally. Taking some profits home is never a bad idea, particularly when the stock appears to have run ahead of its valuations.

Stock Chart Pattern - Cummins India

Yesterday I had analysed the stock chart pattern of IRB Infrastructure purely from a technical point of view because of the interesting double-bottom formation. I had very little idea of the fundamentals of the company and would not contemplate purchasing the stock because it belongs to a sector that I'm sceptical about.

No such doubts about Cummins India. It is just the kind of stock I like to hold for long term. A market leader in the manufacture of diesel engines of different sizes and used in different industries. A strong overseas collaborator which is also a client. Regular dividends. Good operating cash flows. Steady growth. Low debt. Low risk.

Stalwart stocks like Cummins India won't bring you overnight riches. Neither should you lock it up in a vault and forget about it. The way to benefit from such stocks is to be on the alert for the occasional longer term trading opportunities.

The 1 year bar chart pattern of Cummins India has a couple of notable formations:-

The chart pattern above shows a single bottom in a 'V' shape. Note that the bottom was formed on Mar 9, '09 - the day most world indices formed their bottoms. Both the fall to the bottom, and the subsequent rise, have been gradual and not as sharp as most other stocks.

From the bottom of Rs 148 the stock moved up to Rs 231 in 2 months for a decent gain of 56%. After a short consolidation came a volatile spurt on May 19, '09 - the day after the markets were shut due to extreme volatility after the election results.

The stock chart pattern of Cummins India then entered an interesting consolidation pattern called a 'symmetrical triangle'. The main criteria for such a formation - lower tops and higher bottoms with at least two tops and two bottoms touching the sides of the triangle - have been met.

Triangles can be quite fickle - with three possible options. The most likely one is an upward breakout that will be a continuation of the previous up move. The breakout must be on significantly higher volumes. If the breakout happens on low volumes, then it could be a 'false breakout' - termed an 'end run', with the stock eventually moving downwards.

There can be a downward breakout on low volumes - though a triangle is generally not a reversal pattern. Sometimes such downward breakouts can be 'false' on higher volumes, with the stock subsequently moving up. It is then termed a 'shakeout', i.e. a ploy by strong players to get rid of weaker hands (viz. retail investors) so that they can get back into the stock at lower rates.

The third option is the chart pattern meandering sideways on low volumes and eventually moving out of the triangle near its apex. This option, though possible, seems unlikely because of the increased volume during the triangle formation. This is rather unusual, and indicates possible accumulation.

The breakout - either upward or downward - should happen while the chart pattern is anywhere between half and three-quarters of the distance between the base of the triangle and its apex. The stock chart pattern of Cummins India is in that region now, so we can expect a breakout over the next few days.

The technical indicators are beginning to weaken - not unusual during a triangle formation. The slow stochastic and RSI have slipped down from overbought zones. The MACD is positive but has moved below its signal line. The ROC has dropped close to the mid-point.

Bottomline? Cummins India is a solid long-term portfolio stock, but it has moved up quite a bit from its recent bottom. In any case, one should wait for the breakout from the triangle to initiate action. Should the stock chart pattern break upwards, the next resistance is likely at Rs 350. On a downward breakout, support will be at Rs 230.

Stock Chart Pattern - IRB Infrastructure

Before discussing the stock chart pattern of IRB Infrastructure, I have to make a confession. Normally, I would not analyse a stock about which I have no idea whatsoever. More so, because it is in the engineering and construction sector which is notoriously opaque in its accounting practices.

Yesterday, I read this article in the Business Standard about IRB Infrastructure and was intrigued enough to take a peek at the stock chart pattern. What I saw was so fascinating, that I could not pass up the opportunity of sharing it with my readers.

Without further ado, let us take a look at the 1 year bar chart pattern of IRB Infrastructure:-

What you see above is a classic double-bottom formation. The first bottom was formed at Rs 65 on Dec 2, '08. The second - slightly higher - bottom was formed at Rs 77 on Mar 27, '09. Almost a 4 months gap between the two bottoms. This long gap ensures the solidity of the bottom formation.

In between, the stock price rose all the way to Rs 147 on Dec 30, '08 and then gradually drifted down on low volumes. Note how the volume rose significantly as the stock price moved up from the second bottom - in absolute copybook fashion.

The stock is currently facing resistance near the previous top of Rs 147. A correction down to its 20 day EMA - which has just crept above the 200 day EMA - can be expected before the next rise.

The slow stochastic and RSI are in overbought zones. The MACD is positive but made a lower top. Likewise for the ROC. The technical indicators are also hinting about a correction.

Double-bottoms provide price target indications. The distance from the lower bottom of 65 to the top of 147 gives a Rs 82 difference. The minimum upside can be (147+82=) 229. That would take it close to the high of 222 made on Apr 29, '08 and gives a potential 60% upside from the current market price of Rs 143.

Bottomline? Price target mentioned is based purely on the stock chart pattern of IRB Infrastructure. I haven't checked the fundamentals at all. Any one planning to invest should cross-check the Business Standard article with company annual report and SEBI EDIFAR site for veracity of the figures mentioned.