Stocks | Jul 1, 2010 | 1 Comment

When Charts Should Scare Us—Analysis of Harbin Electric

Technical Analysis Shows Different Picture . . .

Yesterday, I was researching various Chinese companies for possible investment. My searching took me over to Fool.com for an article about Harbin Electric Co. (Symbol: HRBN) Various comments over there talked about how this stock around $17 was “bottom fishing” and “likely to perform well.” But then I looked at the chart.

While the fundamentals might look interesting and recent price memory has the average  investor thinking it’s a deal, the chart is telling another possible story. It’s worth noting that the “Caps Rating” over at Fool.com is 4 out of 5.

Fundamentals First

Depending on how you evaluate stocks, you might find the fundamentals appetizing. Here’s some basic information about the stock.

Price: $16.65 as of this writing

P/E: 17.90

Forward P/E: 5.88

P/S: 1.74

EPS (ttm): 0.93

Institutional Ownership: 60.78%

Profit Margin: 12.55%

Target Price: $30.50 (according to FinViz.com)

A quick scan of HRBN looks pretty decent. However, when I looked at the chart, it froze me in my tracks.

The Chart Shows Downside

First up is a two year chart. I’ve put some notes on it. The chart is from FinViz.com. Take a look:

Notice anything? Here’s a couple observations:

1. The stock price is at a critical point. Will it bounce from here or break the line and go down?

2. We have two patterns in reverse of each other. Look at the end of 2008 and start of 2009. You have a “W” or double bottom that formed. This sent the price higher over the coming months. It started in September 2008. Now look at the exact moment in time one year later. September of 2009 started the “M” or double top you see.

It’s a little too precise to be ignored. In fact, there was even a little bounce up.

Based solely off of this, I can’t buy this stock. While it may bounce up by a couple dollars, it’s not guaranteed and the trend is down. In the first trend, there was a bounce back of about $5 per share before it resumed the upward trend. Might we see the same? There was a bounce of about $2 per share already. Was that it?

And then I pulled up the monthly chart, which shows another bearish story. Take a look at the pattern. Notice anything? Your immediate reaction should be to see possible downside. In other words, nothing on the chart is currently suggesting a move higher.

Here are a few points from my chart. Keep in mind, you could of drawn lines all over the place. I’m like keeping things somewhat clean. The more you need to “look to see” the less likely other traders are seeing what you see, which means the less likely what you see becomes a self-fulfilling prophecy.

1. The chart looks bearish in nature. It’s in a downtrend.

2. The price is currently at a critical point, which corresponds to our other chart. Could it bounce from here or break the line? While it did break the line technically, it didn’t hold. Therefore, we wait.

3. The next stop is around the $14 price mark. From here it could either begin a recovery or continue on to complete the pattern.

4. The $7.50 area looks be be a good support line and the $5 mark completes the pattern.

From a “chart only” historical perspective, a couple of things stand out.

A. Around the start of 2007 and 2009 the stock dipped down. It’s on pace to do so around the start of 2011, which would keep with the trend.

B. Each time it’s dipped, the dip has been lower. In 2007, it stopped around $7.50 or so and in 2009 it went further down by heading to the $5 level before rebounding.

C. Furthermore, the peak in 2010 is lower than 2008 and volume is increasing.

Conclusion

The big question is how low HRBN will go. Just from a technical perspective, you can start to see a couple scenarios. One has the stock coming down to the $14 – $15 mark and bouncing up from a couple dollars per share to even $20 per share. On the other hand, there’s evidence suggesting a possible decline under the $10 per share mark, perhaps even to the $5 level again.

What are your thoughts? Do you think the chart analysis is accurate? Do you value fundamentals more? Would you stay out of a stock if the charts showed a different picture than what your fundamental analysis was saying?