Two-wheeler stocks: Test ride before buying them

Mayur Shah

The intermediate rally gained momentum last week as indices around the world zoomed up and more stocks moved ahead. The rally has resulted in the Sensex recovering more than 350 points and has still some more steam left in it.

The earlier intermediate top is at 3359 and the Sensex will have to move past this level if the major trend has to turn up.

This may not be possible in the current intermediate uptrend and investors will have to wait for the formation of a higher intermediate bottom in the next intermediate downtrend.

A higher intermediate bottom will be the first signal that the major trend of the Sensex may have turned up. Also we have seen that a few stocks in the current intermediate uptrend have already taken a lead and have gone into a major uptrend by crossing their earlier intermediate tops.

As more stocks go into a major uptrend, a start of a new bull run may not be ruled out.

FIIs, who were sellers last month, have turned around and started buying. This buying has been increasing daily, which is a bullish sign. The selling by local fund is lower, but is still persisting. This could trigger a sell to the current intermediate uptrend. However, investors must now keep a watch at the next intermediate downtrend and if the indices exhibit a higher intermediate bottom, they must start looking out for long positions in strong stocks and strong sector.

In the past six months, I have taken up the two-wheeler sector a couple of times and today I will again take a look at this sector as one more stock has joined Hero Honda and has gone into a major uptrend, that of Bajaj Auto.

The relative strength line of majority of the stocks is bullish suggesting that the sector was not falling as sharply as the indices. When buying comes into this sector, stocks soon go into a major uptrend.

Bajaj Auto
The two-wheeler sector has been discussed by me in the past and I had suggested that investors must pick up long positions when the stock broke out of the symmetrical triangle.

The breakout of the symmetrical triangle happened last week and the major trend of the stock is now up as it has exhibited ascending intermediate tops and bottoms.

The breakout of the symmetrical triangle gives the target of 350 in the current intermediate rise. The 30 weekly moving average (WMA) for the stock has also turned up confirming the major uptrend.

The relative strength line was already bullish and has been staying above the zero line since the past few weeks which means that the stock has been outperforming the indices.

Investors, who have picked up long positions in the stock must hold on to it and more long positions can be added in the minor decline in the coming week.

LML
LML is in a major downtrend as the stock continues to exhibit descending intermediate tops and bottoms and has been staying below its falling 30 WMA. The weekly momentum indicators have been exhibiting a positive divergence, which means that the selling pressure is reducing. But with no great buying coming into the stock at this stage, any intermediate rise will be a rally within the major downtrend.

Also the stock is well below its falling 30 WMA and will require quite some time to bottom out. The relative strength line is staying below its zero line indicating that the stock is weaker than the Sensex.
Investors must stay away from the stock as it is the weakest of all the stocks in this sector.

Hero Honda
Hero Honda was the first stock in this sector to go into a major uptrend by breaking past the strong descending trendline. The stock has exhibited ascending intermediate tops and bottoms and is currently facing a resistance at the 195/200 level. Any correction is likely to pull back the stock towards the long-term 30 weeks moving average and will give investors an opportunity to add to their long positions.

Those who are holding long positions must continue to do so and may also add more long positions when the stock pulls back towards it 30 WMA. This long-term moving average will act as a support. The weekly momentum indicators are exhibiting short-term weakness suggesting that the stock is already in a correction.

TVS Suzuki
TVS Suzuki has been staying below its falling 30 WMA suggesting that the major trend of the stock is still down. The stock has been also facing a stiff resistance from the descending trendline just below the 30 WMA.

It will have to breakout above this descending trendline with a spurt in volume to go into a major uptrend.

Investors can pick up long positions in the stock on a close above the strong descending trendline.

They must avoid picking the stock now in anticipation of a major uptrend as the current bottoming process could last for a few weeks and investors will get frustrated.

The relative strength line is moving up and is very close to its zero line.

A close of the stock above the descending trendline will also take the relative strength line above the zero line.