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Thursday, May 22, 2014

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

Mah Seamless_May2214

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

Ratnamani_May2214

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.

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