RSI stands for Relative Strength Index. It is a momentous oscillator used to identify trend reversal. RSI was invented by Welles Wilder Junior. The default look-back period for RSI is 14, however this can be lowered to increase sensitivity or raised to decrease sensitivity. RSI calculates strength of stock trend and helps to predict their reversals.
Why to Buy Larsen & Toubro?
There are a lot of trading strategies using RSI; below mentioned is one of the most popular among trading community which involves buy after completing retracement for higher movement; however support of another momentum oscillator stochastic can give additional support.
In last some days, RSI had given a breakout by trading above 50 levels from below and made a high of 80 then after it is trading lower or retracing towards center line placed at 50 levels, this behaviour is called as 'RSI PBB' setup. RSI PBB is pull back buy setup which indicates, once RSI turns its tail upside after taking support from zone of 45-55 levels, target is previous swing high of RSI which was 70 or previous swing high of prices (Rs 1,025). Currently the L&T is going through this setup and we expect higher price movement towards previous high Rs 1,050-1,075 levels in coming days.
Figure .1. RSI PBB setup and Buy signal on L&T
1. Recent RSI gave a breakout and published swing top around 70 levels.
2. After marking high of 70, RSI is retracing towards 50 towards mid-line standing around 50 mark.
3. Strong bullish candle formation near buying zone has given us confirmation of retracement complete and original trend begin.
4. Mid-term moving average 50 DMA placed around 945 levels defines mid-term trend is very well augur with bulls as prices are sustained and trading above it.
5. Decent volume participation while forming bullish candle will also give additional confirmation.
Whenever price candle will be near previous swing high which is near Rs 1,050-1,075 levels.
Entire bullish view negates on breaching of a swing low and one should exit from long position. In case of L&T it is standing around Rs 940 mark closing basis.
We recommend buying Larsen & Toubro around Rs 970-975 levels with a stop loss of Rs 940 on a closing basis for higher targets of Rs 1,050 and Rs 1,075 levels as indicated in above chart.
The author is Head - Technical Research at Narnolia Financial Advisors Ltd.
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