Thursday, August 16, 2012

Stock Chart Pattern - Larsen and Toubro (An Update)

The previous update to the stock chart pattern of Larsen and Toubro was posted back in Apr ‘11, when the stock was testing the support/resistance level of 1750 after trying to find a bottom at 1475. Earlier, the stock had touched a peak of 2212 in Nov ‘10 – which was a lower peak than the 2335 level the stock had touched in Nov ‘07.

The stock price consolidated sideways between the two support/resistance levels of 1750 and 1475 for the first 6 months in 2011 before breaking out upwards to touch an intra-day high of 1868 on Jul 8 ‘11, followed by a second slightly lower top at 1864 on Jul 26 ‘11. The small double-top reversal pattern ended the intermediate up move from the May ‘11 bottom.

The stock price dropped back into the consolidation zone between 1750 and 1475 for the next 2 months, and finally dropped below 1475 on strong volumes on Sep 23 ‘11. After receiving good support at 1300 for the next month and a half, the stock fell below 1300 in Nov ‘11 only to bounce up above 1300 in early Dec ‘11 and then fell off a cliff down to 971 in Dec ‘11.


The 2 years daily bar chart pattern of Larsen and Toubro is a good example of how support and resistance levels can play an important part in deciding when to enter or exit a stock. High volumes during an upward break out through a resistance level is a requirement for a break out to be valid. Downward break outs below support levels need not be supported by high volumes. But a high volume downward break out is likely to turn the support level into a strong resistance level during a subsequent up move.

Note that the upward break out through the 1750 level in Jun ‘11 was not accompanied by significantly higher volumes. The stock price could not sustain above 1750 for very long. On the other hand, the break down below 1475 was accompanied by a sharp volume spurt, which has turned the 1475 level into a strong resistance.

In today’s (Aug 16 ‘12) trade, the stock price has broken out above the blue down trend line that has ruled the chart since Nov ‘10 – but the break out was not accompanied by any volume spurt (marked by blue arrows). It is no surprise that the stock hasn’t yet crossed above the 1475 level.

The 50 day EMA has crossed above the 200 day EMA and the stock is trading above all three EMAs. Technically, the stock is back in bull territory. However, the bulls have plenty of work before they can regain control of the chart.

MACD and ROC are looking bullish, but both are showing negative divergences by touching lower tops. RSI and slow stochastic are also bullish but looking overbought. So, expect some correction or consolidation before the 1475 level is overcome. The next hurdle on the up side will be 1750. Only a convincing cross above 1750 will put the bulls back on top.

Bottomline? The stock chart pattern of Larsen and Toubro seems to be finally getting out of a strong bear grip. One can enter with a strict stop-loss at 1300, and add more on a cross above 1750. But don’t expect any fireworks. The infrastructure sector is still out of favour, and the stock is meant for patient long-term investors.

1 comment:

Subhankar said...

BusinessLine recently gave a buy call: