»Fast Profits Daily by Equitymaster

On This Day - 24 MAY 2022
Should You Invest in Diagnostic Stocks?

Brijesh Bhatia, Research analyst

Diagnostics stocks have fallen badly in this market correction.

Lal Path Labs, Metropolis, and Thyrocare have taken a beating. Some investors and traders seem to think, they could be good stocks to enter now.

But what do the charts say?

Find out in this video...

Hello viewers. Welcome to the Fast Profits Daily. Myself Brijesh Bhatia.

Markets have been very, very volatile in recent times. And that too, with the gap up and gap down openings.

I have done a video on the market that fear D-street is at the lowest level of 2020 and 2008, where market have corrected very quickly. Back in 2022 where stocks are trading at around covid levels, there are few stocks which are trending higher.

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If a look at the markets it's been taking huge support at 15,400-15,700 levels which I have mentioned in the video and market is coming back very, very strongly.

If you want to know the levels on Nifty, Bank Nifty, and sectoral indices, do follow me on my telegram channel, where I regularly post charts on the various levels for Nifty, Bank Nifty, and various sectoral indices.

In this video, I'm discussing if you should buy the diagnostic stocks. All or most of the diagnostic stocks are trending at 52-week lows. Is the covid rally or I would say the pandemic rally over in these stocks and should one exit? Or should you buy at lower levels?

 

Let's start with the Dr Lal Path Labs. And if you look at the first chart over year, prices broke out, retested in 2020, and if you look at this black line where the retest happened, the breakout and retest happened, since then, the pandemic rise was very fast and furious.

We have seen pharma, one of the top leading sector in 2020. But if you look at the diagnostics, yes, the rally was continuing till the first half of 2021 as well. And if you look at the rally, it was very fast and furious for Dr Lal Path Labs.

We saw a breakout of somewhere around 1,250. We tested those levels during the pandemic, and it went around 4,400 levels. So it was nearly 2.5 times plus on the stock. But now, we are back towards the lower levels somewhere around 1,900 levels.

Should you invest? Let me show the second chart, what the technical structure is indicating over there.

 

Now if we look at this red line on your screen, we have seen a fresh breakdown of the rising trendline. Generally when this steep rally happens, and the breakdown happens. the fall is very, very severe. And that's what happened in Dr Lal Path Labs.

Now look at the breakdown. It broke down at around 3,700-3,800 and back towards now we are trading below 2,000 levels. So since then it has fallen by 50%.

Look at the structure over here. As per the Dow Theory, the lower high, lower low structure is indicating that still there is a negative momentum continuing in the Lal Path Labs. So it's an avoid as of now.

 

Look at this chart over here. This is the Metropolis chart. Again a similar structure. Look at the rally which we have shown in 2020. In 2020, the low was around 950. It went to to around 3,600 levels, nearly four times, and coming back to 1,750-1,800 levels downside and again the similar structure.

The breakdown happened into the rising trend line, and we saw a huge selling pressure coming onto the weekly scale.

Additionally, if you look at the green line over here, it is indicating that the fresh low is being forming on the weekly scale. Which means that the higher high, high low structure, which was there during the pandemic time, is turning out to be the lower high, lower low structure.

The lower high, lower low structure as per the Dow Theory is a bearish structure. So one should definitely avoid Metropolis as well as an investment. Third, I am looking at the Thyrocare over here.

 

We saw the five-wave upside in the Thyrocare, right from the 2020 low. If I look at the low it was at 425-430 levels, back towards the 1,400 plus levels, and now, the stock is back into the 650-670 mark, which is again half from the higher levels.

So if you look at the structure, the green line, which is the lower high, lower low structure, it's indicating that this stock as well is into the bearish structures now as per the Dow Theory.

Now I have taken these three stocks because they are the leaders in the diagnostic space. And if l look at the broader sector, the structure is very, very bearish, forming the lower high, lower low structure.

So as an investment I think, it's an avoid till we see a consolidation happening into the stocks and these stocks are forming higher high, higher low structure on the daily charts as well. But as of now it's a clear indication that the broader frame for diagnostic stocks is very, very bearish.

One should avoid investing in these stocks and in case you are holding them, any rise could be an exit because till the higher high, higher low structure is not formed, I think the stocks should be an avoid, or the sectors is an avoid from the short to medium term point of view.

Signing off, Brijesh Bhatia.

Warm regards,

Brijesh Bhatia
Brijesh Bhatia
Research Analyst, Fast Profit Report
Equitymaster Agora Research Private Limited (Research Analyst)

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