Keep close watch on 4-wheeler stocks; upturn likely soon

Mayur Shah

Group analysis is relative strength analysis -- searching out the industries which are performing most strongly (or weakest, if you are looking for short side candidates,) with an added feature: when many, or even all, of the individual stocks in a group are demonstrating strength, it gives the moves added validity. So, when you are ready to trade a rally, pick a relatively strong industry group and then determine which of the individual stocks in that group has the best risk/reward ratio. A trader who buys the breakout, reduces that element of risk; he knows he is jumping on a stock that is showing strength. In the past few weeks, I have first looked into the Indian pharma stocks and next I took a look at the two-wheeler automobile sector.

Today, I will take a look at the four-wheeler automobile sector. A few stocks in this sector have gone into a major uptrend in the last week and more stocks may join this move in the next few weeks. Investors must keep a watch at strong stocks in this sector and get into the best stocks within this sector.One of the biggest problems, even in a bull market, is that a trader will hit a couple of good stocks during an intermediate up-move, and then suddenly he will have great difficulty in finding another good looking trade. My advice is - do not force it. The market is trying to tell you some thing; so listen! Make sure the risk/reward ratio is in your favor.

Another situation for the trader to beware of is one where you have caught a good intermediate term move, made several good trades within the rally, and suddenly realise you can only find “the cheapies” looking attractive. This almost always turns out to be a “suck-in” before the market reverses and can cause you to give back plenty of your profits in a hurry. If you had several winners in a row and now have a lemon, take the loss fast and sit back.

And if that happens as the “cats and dogs” come to the fore, take it as an indicator that the intermediate uptrend is coming to an end.
We have seen relative strength stocks surging and this happens when the intermediate uptrend is mature and an intermediate term correction is likely to be under way soon. This will give investors an opportunity to pick up strong stocks at a reasonable price. In the four-wheeler, a few stocks have already gone into a major uptrend and more stocks may follow. Investors must concentrate on this sector.

Ashok Leyland
Ashok Leyland is oscillating about its 30 WMA since January 2001 and has been staying within the symmetrical triangle. The stock has been exhibiting a bullish relative strength as the relative strength line is staying above its zero line. The weekly MACD has moved above its trigger line, suggesting that selling pressure in the stock is reduced and the rise in the trading volumes in the past two weeks suggest that buying pressure is on the rise.

A breakout above the upper descending trendline with a spurt in volume suggests that the stock’s major trend is up and investors must get into the stock.

The stock is very close to its upper resistance line and investors must keep a close watch. The relative strength is already bullish and a breakout with a strong volume will mean that the major trend of the stock is up. This will be confirmed once the stock moves past its earlier intermediate top of 67.50, which is very near.

Telco
Telco has already moved past the strong descending trendline and its earlier intermediate top to confirm that the major trend of the stock is up. The stock is consolidating just above its earlier intermediate top and investors must hold on to the stock. Any pull back by the stock towards its 30 WMA must be used to get into the stock. The 30 WMA for the stock has already turned up, which also means that the major trend of the stock is up. The relative strength line for the stock is above its zero line, suggesting that the stock is outperforming the Sensex as the relative strength line continues to move higher.

Escorts
Escorts is still below its falling 30 WMA and its earlier intermediate top, and hence, the major trend of the stock is still down. However, with many stocks in this sector already being gone into a major uptrend, we are likely to see more stocks going into a major uptrend soon and Escorts may follow suit.

However, with the 30 WMA still falling, the bottoming process could take some more time and investors must pick up the leaders in this sector. The weekly MACD histogram has moved past its zero line, which means that the buyers are becoming active as selling pressure has reduced. But, with the stock below its falling 30 WMA, investors must wait for more confirmations.

Mahindra
Mahindra has recently been exhibiting a very strong upward move as the stock moved past its earlier intermediate top and is in a major uptrend. The relative strength line for the stock is very close to its zero line and will soon close above it. The current strong move, with a spurt in volume, is a very bullish sign and any minor decline must be used by traders to get into the stock. Investors must hold on to the long positions and can get into the stock in a correction. The strong volumes in the last week suggest that institutional investors have become quite active in the stock and the stock may take a lead in this sector.

Punjab Tractors
Punjab Tractors is also in an intermediate rise like the other stocks in this sector. The stock is moving close to its 30 WMA and may have also bottomed out like majority of the other stocks. But, with the 30 WMA still down, investors must wait for the next intermediate term correction before getting into the stock.

The relative strength line is just below its zero line and will soon cross it, once the stock exhibits more strength and moves into a major uptrend. The stock will have to move past its earlier intermediate top of 172.95 in the current intermediate rise, or will have to exhibit higher intermediate bottoms in the next intermediate downtrend to confirm a major uptrend.