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Wednesday, June 16, 2010

Stock Chart Pattern - Larsen and Toubro (An Update)

In my prior analysis of the stock chart pattern of Larsen and Toubro, the formation of a consolidation pattern called a 'pennant' (or, a narrow triangle) was observed, after the stock had retraced almost 70% of its bear market fall from 2335 in Nov '07 to 557 in Mar '09.

In technical analysis, a retracement exceeding the Fibonacci level of 61.8% is treated as a trend reversal. So is a rise above the 200 day MA. That means the stock had shaken off the bears successfully and entered a new bull market.

Triangle patterns tend to be unreliable, and though I had expected an upward break out from the 'pennant', possibilities of a down ward break or a sideways consolidation (which would mean a failure of the 'pennant') could not be ruled out. This is the reason why many investors look down upon technical analysis - pattern outcomes can often be unpredictable!

Let us take a look at the 3 years bar chart pattern of Larsen and Toubro:

LnT_Jun1610 

Two long-term support-resistance lines have been drawn at 1300 and 1750. After 4 months of consolidation within the 'pennant', the stock did break out upwards, as expected in a bull market. Why did the 'pennant' fail and the stock start a sideways consolidation within 1300 and 1750?

To answer the question, take a look at the volume bars during the 4 months the stock spent within the pennant. The volumes declined gradually, as they are supposed to do during a consolidation. But an upward break out from any consolidation pattern requires significantly higher volumes. (A downward break does not necessarily need volume support.) The volumes during and after the break out were lower. 

The sideways consolidation within the band of 1300 and 1750 has continued for more than 12 months, much like the Sensex band of 15300-18000. Such prolonged periods, which provide little or no returns, test the true mettle of long-term investors.

The technical indicators are giving mixed signals. The 50 day and 200 day MAs have become entangled. The slow stochastic is in the overbought zone. The RSI has just dipped below its overbought zone. The MACD is slightly positive and above the signal line.

Please don't make the mistake of getting bored and dumping the stock. This is a fundamentally strong and well-managed leader in the infrastructure space, and should find a place in any long-term portfolio.

Bottomline? The stock chart pattern of Larsen and Toubro may continue consolidating in a rectangular band. Existing share holders should stay invested. New entrants should wait for a break out above 1750 on strong volumes, or a break below 1300. As and when the Sensex starts to make new highs above 18000, the stock of Larsen and Toubro will be a leader of the Sensex pack.

7 comments:

Titu said...

Hello Sir,

Thank you for update, it's my core portfolio stock.


-titu

Subhankar said...

You are welcome, Titu.

Wish more small investors would take sensible investments decisions like you - instead of chasing after mirages like Punj Lloyd and GMR Infra!

D'SOUZA said...

Hi Subhankar,
The sharepattern of this stock does not show any promotors holding ?? any reason.

I have seen this analysis lately , the stock has already moved much above your recommended buy price , what should be the next entry point

The MACD has crossover and now in positive area , ADX shows buyers have increased, stoch is already in overbought area.


Regards
DSOUZA

Subhankar said...

The stock has pretty much followed technical analysis theory, Donald.

A high volume break out above the consolidation zone, followed by a pull back - giving opportunities to new entrants. Thereafter, a new high at 1949 - as the Sensex also rose to a new high.

Another period of consolidation in a 'W' shaped pattern followed by another upward move on good volumes - just as the 20 DMA merged with the 50 DMA.

Expect the high at 1949 to be tested. On a correction, there is support at the 1820-1840 zone. One can enter with a strict stop-loss at 1750.

Subhankar said...

Sorry, missed the first part of your question, Donald.

L and T (like ITC), is managed by the executive team with more than 50% shareholding in the hands of different domestic and overseas financial institutions. The L and T employee's Welfare Trust holds more than 12%. The original founder-promoters diluted their stake and their heirs have no interest in the company.

Titu said...

Hello Sir,

L&T is going to split in to 9 companies, after that news stock price is going down and down, I don't see any wrong, if they make 9 separate companies and list them.

but

Is l&t going to become a holding company? in that case it's PE must get derated, so is this time to sell?

Please Guide...

-titu

Subhankar said...

Demergers are value-accretive for share holders, Titu. But it hasn't happened yet. The cement business demerger led to value unlocking. Once the demerged entities are listed, then we can enjoy the fruits of the demerger.

The Q3 results disappointed the market, so the stock is correcting. Will L&T become a holding company? No idea.