ICICI Securities Limited

Technical breakout
September 23, 2011
Key Technical Data
CMP Price Target Stoploss 52 Week High 52 Week Low 50 days EMA 200 days EMA 52 Week EMA 1491 1200 1550 2212.7 1461 1641.5 1692.85 1688.5

Larsen & Toubro Ltd (LARTOU)

Breach below 1500 signals breakdown from 18-month old support line and Head & Shoulders Top pattern
Exhibit 1: Larsen & Toubro Weekly line chart

The weekly chart reflects the breakdown from 18-month long support line placed around 1500

The price has also broken down from the bearish Head and shoulder pattern on the weekly chart

Source: Spider software, ICICIdirect.com Research

Resilience in turbulent markets

Larsen & Toubro (L&T), the capital goods behemoth, has been the toast of the Street for its strong performance vis--vis benchmarks. While the stock participated in the 2009-2010 rally along with the Nifty to test its own life high, during 2011 the stock has relatively outperformed. Even as the Nifty has been making new lows, the stock has so far protected its February 2011 lows around 1500 levels. Analyst
Dharmesh Shah dharmesh.shah@icicisecurities.com Nitin Kunte nitin.kunte@icicisecurities.com Pabitro Mukherjee pabitro.mukherjee@icicisecurities.com Dipesh Dagha dipesh.dagha@icicisecurities.com

However, during last week, the price of the stock has cracked below this long protected support indicating a change in structure. (Refer Exhibit 1).

Bearish Head and shoulders Top

On Thursday, L&T gapped down (potentially break away gap) and closed below the major support in the 1500-1520 region. This move completed the breakdown below the Neckline of the Bearish Head and shoulders formation on the weekly charts. If it sustains below 1500 for a couple of sessions, that would confirm a break down. As per Classic western technical theory, a Head and shoulders is a Reversal pattern. The pattern gets completed when a breakdown occurs below the neckline, which in the case of L&T was placed at 1545 on a weekly closing basis. The price implication of this bearish pattern works out to around | 1265 as measured by calculating the distance between Head and neckline (1825-1545 = 280 points) from the breakdown level (1545-280 = 1265) The pattern would become void only if the price closes above | 1550 on a weekly basis.

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Rising gap of May 2009
Most of the stocks along with benchmarks have made a huge rising gap as the Indian bourses witnessed their only upper freeze in May 2009 post the General Election results. Historically, such gaps if tested act as a support or resistance for the price action. L&T also formed a gap in the range of 1000-1100 levels, which can be seen as a technical support if tested

Momentum follows price

Momentum indicators like the 14 week Relative strength index (RSI) are usually used to gauge the acceleration of the trend and overbought and oversold positions of the markets. Our observation is that these oscillators also form and follow classic technical patterns as seen in the case of L&T. The 14 week RSI has formed a bearish Head and Shoulders (H&S) along with price validating breakdown of prices. Conclusion: Taking cues from the abovementioned technical patterns, we expect the price of L&T to head lower towards 1250-1170 levels. A change of view would be warranted only if the stock posts a weekly closing above 1550 levels.

Elliott Wave perspective

In Technical Analysis, another school of thought apart from the classic Dow Theory is the Elliott Wave Principle. Both are based on study of price patterns, which depict the psychology of the masses. Exhibit 2 shows markings on the daily chart of L&T. From the November 2010 high of 2212, the stock began its decline and completed its larger degree first wave (or A if it is a larger corrective pattern) at the low of 1500 during May 2011. Since then, the stock climbed to make a high of 1868 during July 2011 completing the larger degree second or B wave of this fall. Then, a larger degree third wave, which is usually a violent wave as per wave patterns, commenced from the July 2011 highs of 1868. Now, it seems to be in its internal third impulse. As per Elliot Wave rules, the third wave is never the shortest in a five wave impulse pattern. Therefore, it should at least achieve price equality with the first wave. Since the first wave achieved a magnitude of 712 points (2212-1500), a similar calculation from the beginning of wave 3 projects downside of 1156 (1868-712).
Exhibit 2: Larsen & Toubro Wave Count

Source: Spider software, ICICIdirect.com Research

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ICICI Securities Limited

Pankaj Pandey

Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com .

pankaj.pandey@icicisecurities.com

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