Tuesday, July 5, 2011

Ashok Leyland - Sell on rallies

Investors with medium-term perspective can consider buying the stock of Ashok Leyland (Rs 51.1).

Following a turnaround from Rs 12.5 in December 2009, the stock was on a long-term uptrend until it peaked out around Rs 81 in November 2010. A downtrend that commenced from its November peak was arrested in the range between Rs 45 and Rs 47 during this February, after retracing 50 per cent Fibonacci retracement level of the stock's previous up move.

Moreover, the stock has significant long-term support in Rs 45-47 range. Last week, the stock took support from this range for the second time and bounced up forming a bullish piercing line candlestick pattern on May 19 by gaining 4 per cent. Reinforcing the bullish momentum, the stock subsequently jumped 5 per cent breaching its 21-day moving average.

A positive divergence in the daily relative strength index and daily stochastic oscillator backs the stocks' trend reversal. We notice that there is an increase in volumes over the past two trading sessions supporting the up move.

The daily moving average converge divergence indicator has signalled a sell. Daily RSI is rising in the neutral region towards the bullish zone and weekly RSI is on the brink of entering into neutral region from the bearish zone.

Though the down trendline is still in place, we take a contrarian stance on the stock considering the above mentioned bullish facts. We are bearish on the stock from a medium-term perspective.

We believe that Ashok Leyland has the potential of moving lower to sub 40 levels owing to the headwinds. The high interest regime couple with slow down in infrastructure could lead to declines in sales. We expect the price to be lower and reach our medium-term price target of Rs 40. However we don't rule out a minor pause spike around Rs 55.5. Investors with medium-term perspective can consider buying selling the stock in the short term. Long term / portfolio investors can consider buying below 40 levels and hold for 15-18 months !

The following table clearly shows the negative bias of the scrip during the last 1 year

Time Span Price Change %Change
Today 49.65 1.30 2.68
Week 47.90 0.45 0.93
Month 51.80 -3.45 -6.66
Three Months 57.90 -9.55 -16.49
Six Months 63.90 -15.55 -24.33
One Year 62.60 -14.25 -22.76


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