Assessing If KEMET's Recent Rally Can Gain Traction

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About: KEMET Corporation (KEM)
by: Individual Trader
Summary

Buy signal on the daily chart.

Monthly chart also shows higher high although a lot of white space below.

Intermediate chart is worrying due to the pattern of lower highs.

As we can see from the daily chart below in KEMET Corporation (KEM), we have a recent gap somewhere between the $17.50 and $18 level which has not been filled yet. In recent trading sessions, price has filled a portion of the gap but the possibility of a breakaway gap still holds some ground.

Breakaway gaps usually take place just at the beginning of a new pattern. As we can see from the chart, KEMET bottomed on the 3rd of September at $16.31. At the point, we would like to see more buying volume in order to really cement the fact that a bullish trend is unfolding. Therefore, traders may have the opportunity here to scale into a long position due to the fact that price is still trading very close to that gap.

Furthermore, we also have a buying signal as the 4-day moving average has now moved above both the 9-day moving average and the 18-day. In fact, we have double confirmation because the 9-day is now trading above the 18-day. All this means is that there is a high probability that a new trend has started especially when we take the potential breakaway gap into account.

The MACD indicator also is giving us a buy signal due to the crossover. When using this tool, the most favorable buying signals occur when prices are well underneath the zero line (which we have at present).

Before we come to any decision though, we like to see how the long-term charts have been trending (namely the weekly and monthly charts). We are not intra-day traders but rather prefer to swing play positions for a period of one to three months (intermediate term). Longer-term charts give us better visibility and quickly ascertain whether the daily chart signals are indeed in line with the long-term trends of KEMET. If they are not for example, the share price may be in line for just a short rally which is not what we would be looking for.

If we go to the monthly chart, we can see that shares rallied aggressively out of their 2009 low. For trending purposes, it was important that the 2017 high closed above the 2011 high. Higher highs mean a long-term bullish trend which is encouraging. What is interesting is that for close to 3 years now, shares have been locked in a narrow trading range. Let's go to the weekly chart to learn more.

As the weekly chart demonstrates below, KEMET's share price seems to have really strong support at around the $16 level. The weekly stochastics are oversold although the upside potential is still uncertain as price remains locked within a tight trading range. After closer inspection though, there is definitely the possibility that shares have been undergoing a long-term descending triangle since the middle of last year. This is a bearish pattern as it is a pattern of lower lows with a lower horizontal line. As noted earlier, the attraction here is the trading range and precisely the proximity of the trendlines below. Whether shares break out or break down, we expect a convincing rally or drop to follow. As of now though, because of the worrying intermediate trend, we would only foresee limited gains from that buy signal on the daily chart.

Therefore, we intend to keep an eye on both of those trendline levels to see if we get a break in either direction. The magnitude of the trading range means a big move is coming. The interesting thing about this stock is that its valuation is well below what the industry is trading at. KEMET has generated $235 million of operating earnings over the past four quarters and is trading at just 1.6 times book value. Suffice it to say, value investors may well be looking at this stock at present. The question though is whether this "cheap" stock is about to get "cheaper" Let's see how far this present rally can go.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.