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Saturday, December 13, 2014

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

Gayatri Proj_Dec1214

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

IRB Infra_Dec1214

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.

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