Technical updates – Maharashtra Seamless and Ratnamani Metals

The global economic slowdown - particularly in China - had severely affected the metals sector. Prices plummeted due to lower demand. Stocks of steel and aluminium companies were hit hard. Stocks of metal pipes and tubes sector also suffered badly. 

But with the government beginning to open its purse strings for infrastructure projects and removing hurdles for stuck projects, things are beginning to look up for the metals sector.

The 3 year closing charts of Maharashtra Seamless and Ratnamani Metals clearly show that all the losses during their respective bear phases have been recovered. Both stocks are poised to rise to new highs.

Maharashtra Seamless

The stock had closed at a high of 358 on Sep 9 '14, but formed a 'triple top' reversal pattern during Aug-Sep '14 that triggered a bear phase that lasted almost 18 months. 

The stock closed at a low of 132 on Feb 29 '16. Note that all four technical indicators showed positive divergences by touching higher lows inside their oversold zones.

A sharp price spike on Apr 4 '16 took the stock above its three EMAs into bull territory. The subsequent rally received good support from the 200 day EMA. The previous top of 358 was touched on Mar 6 '17, but the stock formed a 'double top' reversal pattern by touching 357 on Apr 5 '17.

A bull market correction/consolidation is under way. The company declared decent Q4 (Mar '17) numbers but for FY 16-17, top line and bottom line were lower by 17% and 5% respectively. Valuation looks a bit high.

Ratnamani Metals

The stock had closed at a high of 783 on Mar 3 '15 before dropping into a bear phase that ended almost a year later when the stock closed at a low of 404 on Feb 19 '16.

Oversold technical indicators and positive divergences on RSI and Slow stochastic triggered a rally that took the stock to a new high of 811 on May 3 '17. Disappointing Q4 (Mar '17) results led to a sharp sell off.

The stock dropped below its 20 day and 50 day EMAs to a low of 705 on May 23 '17. Oversold technical indicators have initiated a partial price recovery. For FY 16-17, top line grew by 17.5% and bottom line by 6.1%.

Valuation is on the expensive side. Another dip towards the 200 day EMA may provide a better entry opportunity.

Technical updates – Maharashtra Seamless and Ratnamani Metals

With the massive electoral mandate given to the NDA, expectations are running high about market friendly policies that will pave the way to capital expenditure and job growth. How much the new government will be able to achieve under difficult economic circumstances remains to be seen.

But hope seems eternal among market players. Sector rotation has started already. Money is being pulled out from defensive sectors like FMCG, IT, Pharma and being deployed in infrastructure, capital goods and cyclicals in a bid to make short-term profits.

Stocks of pipes and tubes companies had a rough time during the past few years as infrastructure spending came to a halt. Closing charts of two of them show that good times are ahead. Do your due diligence before jumping on to the bandwagon.

Maharashtra Seamless

The stock of Mah. Seamless suffered a long bear spell that ended with the formation of a ‘double-bottom’ reversal pattern at 155 (marked B1 and B2). The stock rose sharply above its 3 EMAs and then climbed above the long-term support/resistance level of 204 on strong volumes.

Previous support levels, when broken, often turn into resistances. Note how the 204 level provided support in Feb and Apr ‘13. When it got breached in Jun ‘13, it turned into a resistance level for future up moves. Now that the stock price has breached the resistance of 204 on strong volumes, it has turned into a support level again.

The next support/resistance level is at 324. The rally appears to be stalling near it. All four technical indicators are looking overbought; three of them – MACD, RSI, Slow stochastic – are showing negative divergences by failing to touch new highs. Some correction or consolidation here can give the stock sufficient ‘strength’ to cross above 324.

Ratnamani Metals

The stock of Ratnamani Metals was in a long sideways bull market consolidation with a slight upward bias (indicated by the gently rising 200 day EMA). It formed a ‘cup-and-handle’ continuation pattern that took 9 months to complete.

The upward break out in Mar ‘14 was supported by strong volumes. After facing a bit of resistance at the 265 level, the stock soared past the 300 level and crossed its Jan ‘08 high of 308. The stock closed just shy of the 320 level – doubling in less than 3 months.

All four technical indicators are looking overbought and showing negative divergences by failing to touch new highs. Some correction or consolidation is likely.

Note an interesting pattern on the chart – marked by the light blue ovals. On four occasions, all three EMAs converged together. Sharp up moves followed. In bear markets, the sharp moves are downwards.

Stock Chart Pattern - Ratnamani Metals and Tubes (An Update)

In my previous analysis of the stock chart pattern of Ratnamani Metals and Tubes back in Dec ‘09, it was observed that the OBV was moving up while the stock was correcting after touching a high of 118 in Sept ‘09. That was an indication of ‘accumulation’. However, the RSI and slow stochastic were indicating bearishness.

On the longer term charts, the stock was struggling to recover after a huge bear market fall from a high of 302 in Jan ‘08 (adjusted for a 5:1 stock split) to a low of 32 in Mar ‘09. Small cap stocks rarely recover from such a large fall of almost 90%. The fundamentals of the company looked good, but I had clearly mentioned that it was a high risk bet that could touch 150 if it cleared the high of 118.

With the Sensex climbing to new highs, very close to its all time high of 21200, it is an appropriate time to check how this small-cap stock has fared. The one year bar chart pattern of Ratnamani Metals and Tubes reveals that things haven’t gone too well:

The stock moved up to touch an intra-day high of 121 in Jan ‘10 – which was within the 3% ‘whipsaw’ leeway of the Sep ‘09 high of 118. Note how the stock dropped right back to 95. There could not be a better example of the reason why the 3% technical leeway should be used to confirm any breach of a previous top (or bottom).

The stock chart formed a nice cup-and-handle continuation pattern over the next four months and finally broke above the 121 level on decent volumes in Apr ‘10. Note how the OBV remained flat initially and then started to move up when the ‘cup’ was being formed. More sign of accumulation.

After reaching a high of 135, the stock corrected down to 114 and then started a steady climb upwards from Jun-Aug ‘10, using the 20 day EMA as a ramp. It recently touched an intra-day and 52 week high of 148.55 – close enough to the target of 150 mentioned in my earlier post.

Note that while the Sensex has been moving up after breaking out above a year long trading range, mid-cap and small-cap stocks have been facing selling pressure. No wonder, the Ratnamani Metals stock price has corrected sharply down to the 20 day EMA. At its recent high of 148.55, the stock retraced only 43% of its bear market fall.

The 50% Fibonacci retracement level of the bear market fall is at 167. That hurdle needs to be crossed for the stock to re-enter a bull market – even though it is trading above the three rising EMAs. The slow stochastic has dropped below the 50% level and the RSI is about to follow suit. The stock may correct some more before it resumes its up move.

Fundamentally, things weren’t so good last year. Sales dropped by 10% in FY ‘10 though profits were maintained. Cash flow from operation turned negative. Debt burden has increased but remains within manageable limits. Promoter holding is now 57%. It was 60% when I looked at the stock in Dec ‘09. FII holding has gone up from 1% to 5%. The stock is available at a P/E of less than 8, and can be looked at on dips for accumulation.

Bottomline? The stock chart pattern of Ratnamani Metals and Tubes almost attained the first target of 150. The next target is 180. The stock isn’t my favourite in the pipes and tubes space, and remains a high risk bet.