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Is Sinotel Forming A Cup & Handle Formation?
Trend Spotting | 07 May 2010
By: Xavier Lim
Articles (51) Profile

Immediate support line. The technical picture as shown in the chart suggests that Sinotel is still in the bearish trend. The share is probably going through a falling peaks-and-troughs pattern to form a lower trough. Immediate support at around $0.41; next support at around $0.365.

RSI @ 20. However, the RSI indicator is approaching the 20 mark, meaning that it may be getting oversold and is a good candidate for a rebound. Immediate support-turned-resistance at around $0.41. Next resistance line will be around $0.50, coinciding with the 25-day moving average.

Cup and handle. The 3-year period daily chart of Sinotel shows a saucer base formation and looks likely to continue to form a cup and handle. This formation can only be formed if the share can break through the $0.55 price level to form a higher peak, reversing the falling peaks and troughs pattern. Failure to achieve the breakthrough will cause share to trend downwards again.

Fundamentals. The change in telcos’ procurement policy in China which started in late 2008 with the objective of streamlining the development of wireless infrastructure appeared to have hit Sinotel. Overall gross profit margin for 1Q10 declined to 38.2% as compared to 1Q09 gross profit margin of 41.2%. According to AmFraser, the streamlining of the tendering system by the telcos may lengthen Sinotel’s cash conversion cycle slightly. If this is so, it will affect its cash flow generated from operations. As at 31 Mar-10, Sinotel’s cash flow from operations widened to negative Rmb4.095m from negative Rmb0.74m. The drastic change in the industry dynamics places Sinotel on uneven grounds.

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

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