REC Ltd. - A Story of Cyclicality, Reversal and RSI Positive Divergence

Cyclicality is an interesting concept. Entering a stock when it is at the bottom of its cycle takes courage, sound understanding of the market’s pulse and a lot of guts. Execution takes places on the basis that the worst has happened and what is left to happen is only possible good or nothing. Cyclicality is prevalent in the stock market and does not receive as much credit as it deserves as an investment ideology. 

A prominent analyst who uses cycles to make his stock picks is Mr. Prashant Jain, ED & CIO, HDFC Mutual Fund. I came across an article on Value Research Online which states that he “has a history of being ahead of the markets" and "he has been able to do this by positioning his funds for the next cycle.” I was researching on REC Ltd. and turns out Mr. Jain pickes this stock not long back in May, 2018 itself. The article further observes, “The markets in India have moved in cycles that play out over six to eight years”. I agree with the idea, maybe not with the number since the duration of a cycle in different sectors or markets may not be consistent due to varying drivers.

REC Ltd. is showing signs that indicate a trend reversal. The stock has corrected nearly 60% from it's May, 2017 high of ~225 and forged a pin point low near ~90.

In the past two instances of trend reversal also, the stock turned up to give multi-fold returns after correcting approximately 60% from its high. The same has been put in the table below for your reference. The following chart hold arrowed indication of the tops and bottoms mentioned in the following table. 

Chart 1 REC (Weekly) captured on 31.08.18. Showing the past tops and bottoms

Now that we have established the possible end of the correction phase in this stock, let’s turn to the cluster of evidences indicating the beginning of an uptrend here.

[These are objective technical observations without any reflection on the fundamental standing of the stocks. My preliminary understanding is that besides the possible recent plea of restructuring (parivartan) which the government and REC have taken to the RBI, the mount of debt on the company and on the power sector as whole, is worrisome. But because changes in price trends usually occur in charts before the fundamentals start reflecting a turnaround in any company, we will keep an eye out to pick signs of improvements in the books]

Chart 2 REC (Daily) captured on 31.08.18, Showing RSI positive Divergence, spurt in Volumes and Breakout

In the above chart, there are three significant evidences which make me believe the stock might have bottomed out. Let us look at them in details:

1. RSI positive divergence – The point at which REC bottomed out most recently was accompanied by a higher-low on the RSI. The positive divergence is a very effective RSI behaviour and has been an effective leading indicator of a bottom. It is obviously not the Holy Grail or a fail-proof technique, but, the success rate definitely beats it's peers. The positive divergence has been shown using the two slanting lines on the chart. The price was seen making a lower-low while RSI forged a higher-low thereby indicating strong upside momentum in the stock despite declining prices. Soon following the positive divergence we saw a one-sided strong rally which took the stock of REC very close to the previous high marked on the above charts by blue and pink arrows respectively.
2. Breakout with high Volume- Volume has been showing good support to this trend reversal. We can observe two clear volume spurts on the recent volume data in the above chart (indicated by the box). A close observation of the price and volume behaviour shows that not only has volume been picking up on the up moves in price (indicating strong consistent buying called accumulation) but also, volumes declined upon consolidation.
3.  Breakout- The price has shown a breakout above the level of 118 which was the resistance zone and that with strong volume. This move above the recent high formulates a higher-high. To further substantiate this trend reversal I am hoping to see further gain in prices followed by a correction which holds above the previous low. For now, the stock continues to inch higher.

Now moving on, let us discuss the potential resistance zones on the chart.  

Chart 3 REC (Daily) captured on 31.08.18, Arrow marking the important support/resistance at importance price levels

The above chart highlights two zones of resistance at 150 and 186 respectively. The past instances of price reversals at these zones has been highlighted by arrows for your reference. I believe now that the price has surpassed the resistance of ~115 after taking resistance, showing a pullback and subsequent breakout with volume support, 115 should act as the new support level.

If you look closely at the above chart, the blue line running through represents the 100 EMA. It lies at the level of 115 thereby reinforcing the role of the level as an important support for the price.

This is all I have to say about this stock, REC Ltd.

Thank you for reading. I would appreciate your feedback and comment on this post.

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As a disclaimer, this isn't a stock recommendation but a mere observation of a great phenomenon unfolding on the chart.

Another disclaimer: I am not long on this stock. 

A warning: Anyone investing on the basis on this article will be doing so at their own risk. Please be responsible.

You can reach me at kchamaria1993@gmail.com for analysis of other stocks (NSE, NYSE, LSE as long), commodities or currencies, I will try my best to respond.