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China Animal – A Potential Double Bottom In The Making?

Contributed by Shares Investment

By Ernest Lim

China Animal Healthcare Ltd. (“CAL”) seems to be on the verge of completing a double bottom formation, if it can break the neckline at $0.280 with volume expansion.For the uninitiated, CAL has three main business divisions outlined in Table 1 below.

Other indicators such as On Balance Volume (“OBV”), RSI, MACD etc exhibit bullish divergences from 25 Mar to 8 Jun. I have appended RSI and MACD charts in Charts 2A – 2B. They are sourced from Metastock as of 10 Jun 11.

Scenario 1: Price breaches $0.280 after some consolidation

Having surged 7.8% from the low of $0.255 on Wednesday to $0.275 on Friday, CAL may consolidate around $0.280 in the near term and fail to break above it convincingly. Once the consolidation is over, CAL may then breach $0.280 convincingly. The odds for this development are slightly higher than Scenario 2 as it has moved up significantly for the past 2 days. Furthermore, a layer of resistance exists around $0.280 to 0.285. It is also noteworthy that the duration for this potential double bottom formation seems to be shorter than the usual norm of 1-3 months. Thus, I would personally prefer CAL to consolidate first (i.e. “to digest the gains and gather buying momentum”) so that the breakout which occurs subsequently is likely to be more sustainable.

It is noteworthy that consolidation can occur over a period as short as days, or as long as weeks.

Scenario 2: Price surges above $0.280 without any consolidation

Nonetheless, there is always a possibility that CAL may be able to breach above $0.280 without any consolidation around that level. However, due to the aforementioned reasons in Scenario 1, the odds favour a near term consolidation around that level. In addition, such rapid rally / breakout (without consolidation) may not be sustainable over time.

Scenario 3: Price fails to breach $0.280 and trades below $0.280 for a long period of time

CAL’s rally may fizzle out at $0.280 and may not breach $0.280 for a long period of time. As a result, price may slowly drift sideways or downwards.

Conclusion: Scenarios 1 & 2 are more likely with Scenario 1 being the most likely

Based on the current information (note chart development changes constantly), it is likely that Scenarios 1 & 2 are more likely than 3, with Scenario 1 being the most likely. In addition, the recent positive news development on CAL seems to corroborate the potential upward movement in share price.

Here are some recent developments outlined in Table 2 in chronological order for ease of reference.

Lastly, if CAL manages to breach $0.280 convincingly in the next 1-2 months, a measured target (i.e. potential upside) is likely to be around $0.30.