Chart review Sigma Pharmaceuticals. Buy signal?

By Kenneth Robson on November 11, 2013 • ( 1 )

Probable recovery stock

Disclaimer

I have selected Sigma Pharmaceuticals for technical analysis, based solely the daily chart, ignoring fundamental considerations important though they may be.

The opinions expressed are my own, and should not be relied on for financial advice.

Sigma Pharmaceuticals (Photo credit: Wikipedia)

Historical background

Two Melbourne pharmacists established the company just over a hundred years ago (1912), and established manufacture capability in 1942.

The first listing of Sigma in 1997 is an interesting story. Until then it had been a cooperative owned by pharmacists who were reluctant to yield control under the “one share, one vote” rule for listing on the ASX. Yet they needed equity capital for expansion.

A happy solution was provided for them by publicly listed investment and financial services group Austock. Sigma became the first in 1997, of 22 companies to list through Austock on the Exempt Stock Exchange. Listed companies were exempt from the licensing and reporting requirements of the ASX. The structure allowed for separate voting and non-voting shares for Sigma.

The initial listing of The Sydney Future Exchange (SFE) Corporation was on the Exempt Exchange, as was the listing of fruit processing company SPC Ardmona, before both moved to the ASX. In January 2005 the Exempt Exchange became a listed entity, utilizing the old trading platform software and is now known as the Asia-Pacific Exchange.

With the additional capital Sigma acquired the Guardian pharmacy group, the Amcal Pharmacy Group, and Smith-Kline Beecham’s Dandenong manufacturing facility, before eventually listing on the Australian Stock Exchange in 1999.

Since listing Sigma has acquired Heron Pharmaceuticals, and Chemists Own.

In 2005 Sigma merged with Arrow Pharmaceuticals and was renamed Sigma Pharmaceuticals.

The pharmaceutical industry is not necessarily a lucrative business . The Research and Development of new drugs is very expensive, and once found companies must manufacture and market them, often to a limited market. When Sigma’s profitability suffered, they ended up in 2011 selling their pharmaceutical division to Aspen Australia, a division of the South African giant Aspen Pharmacare Holdings for $900 million debt free.

Now Sigma is concentrating on its role of full time wholesale and distribution business to pharmacy outlets.

Technical considerations

Sigma’s share-price has been in decline for six months since the 17th May 2013 when it peaked at 85.5 cents.

It reached a low on October 9 at 50.5 cents but quickly rebounded and on the chart appears to be forming a modified head and shoulder pattern in which the right shoulder has entered into a triangular trading range as shown.

The candle-stick appearance for trading on Friday November 8 was a small “dragon-fly” Doji which significantly gapped up above the resistance of the upper border of the trading range. It was a Doji because both the open and the close prices were the same at 58 cents suggesting trader indecision.

Coming at the end of six months of decline, a dragon-fly Doji is strongly bullish. On Friday, buyers were willing to bid the share price above the trading range, and returned to the fray later in the day after sellers had caused the price to weaken slightly,

Today buyers may well be willing to pay still higher prices. For example other chartists may also regard Friday as providing a buy signal on the basis of the break-out, in combination with the candle-stick appearance.

If this interpretation proves correct, an impulsive move higher may see prices lift quickly to the last support level of 64 cents, with a subsequent target of 73 cents on the basis of the 50% Fibonacci retracement level.

The next target if further restructuring improves profitability next year is 86 cents.

Conclusions

There are three technical features on the daily chart with bullish connotations:

Head and shoulder pattern formation (incomplete) suggesting reversal of the six month down-trend.
Break-out from a short-term triangular trading range pattern.
The appearance of “dragon-fly” Doji, after a period of long-term trending lower.

Further down-side to the share-price is unlikely but last support line was at 50 cents. Stop-loss position would therefore be at 48 to 50 cents.