27 September 2009

L & T : more upside possible

As the Nifty is not doing much and while I wait for any significant correction, I tried some "deep dive". While going through major sectors I noticed that the Capital Goods space actually has been very quiet amongst the recent jubilation of Nifty touching and closing 5000 mark.

I went through the charts of BHEL, Reliance Infra, ABB and few other big names in Infrastructure / Capital Goods space, noticing all of them spending time in sideways consolidation. A closer look immediately suggests that they have completed wave 4 correction after making a wave 3 high and now ripe to go higher than their previous recent highs.

Lets check the L&T daily chart for further study. What we see is that wave 3 high of 1700 is followed by a wave 4 low of 1325. One can also see a upside breakout from the triangle at around 1500. The minimum target for which is 1800.

As for the waves; it definitely seems to be a 5th wave starting from the lows of 1325, where we have low participation and negative momentum divergence. Within this 5th wave we should have another 5 wave structure. 1st of which looks to be ending at 1620 and 2nd ending at 1500, look how we get the retracement back to the point of breakout!

The current wave is the 3rd wave and should atleast be as long as 1st wave which gives us a minimum target of 1820 and a more likely target of 2020. May be we get some correction in between which would generate more interest in this counter.

Now the big question is which I am more interested in is what happens to Nifty when L&T having almost 8% weightage moves around 25% from here. And I am sure if L&T moves it will take other Infrastructure / Capital Goods stocks namely ABB, BHEL, Reliance Infra and Siemens along with it which together contributes 13.5% (L&T included).

So will it be a broad based rally where Capital Goods which have underperformed in recent rally participate or will it be Capital Goods shining while others take rest or correct. At times we see sector rotation, which can well be the case and we can see these stocks catching up while Nifty just being in a mildly positive mode.

But one thing which can definitely be said about Nifty based on these stocks is that we are still to see more upside and we are closer to a small rally than any significant correction. I would definitely suggest people to be overweight in this stock than chase price of something which has already made a new high.


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