Wednesday, April 15, 2009

Stock Chart Pattern - Infosys Ltd.

For this week's stock chart pattern discussion, I could not think of a more appropriate stock than Infosys. A bellwether of the Indian stock market and a perennial favourite of foreign and domestic investors for the longest time, Infosys seemed to have lost its pride of place of late.

A quick look at the 6 months closing chart may allay some investor doubts:-


(Please right-click on the image above and open it in a new tab or window for a better view.)

Well before the global rally started in Mar '09, Infosys moved up above its 20 day and 50 day EMA in Jan '09 - though it remained well below the 200 day EMA. After a small dip, it again moved up and remained above its short and mid-term EMAs till the middle of Feb '09.

After a 3 weeks period of sideways consolidation during which the stock made a higher bottom than the one made in late Dec '09, it started to move up again along with the global rally.

After initial resistance in late Mar '09, Infosys pierced through the 200 day EMA in the beginning of April '09, but then lost its upward momentum and consolidated sideways just above the 200 day EMA - probably due to uncertainty about the forthcoming results.

The above chart is updated up to Apr 13, '09 (the previous day of trading). The Q4 '09 result, declared earlier today (Apr 15, '09) was disappointing but not really disastrous. The  challenging outlook for the near future spooked the market and the stock crashed more than 5% from its previous close.

There are a couple of interesting indications on the chart. Both the ROC and the slow stochastics had started turning down from the beginning of April '09, while the MACD was making new highs and the RSI had flattened just below the overbought zone.

This 'divergence' was partly responsible for the profit booking that happened today, due to which the stock has dipped below its 200 day EMA. However, the 20 day EMA and 50 day EMA are both rising and the 200 day EMA is flattening out.

From early Nov '08, Infosys has made a 'saucer-like' chart pattern which is quite clearly identifiable from the 50 day EMA. This 'rounding bottom' pattern is considered bullish. A strong breakout upwards should be on higher volumes. Volumes have not been significantly higher during Apr '09.

Bottomline? Wait for the selling pressure to subside before entering the stock on the dip. Be prepared for a longish wait for  profits in front-line information technology stocks. There may be other stocks that can provide better returns. Please remember that, like HDFC, Infosys has impeccable management and is a FII favourite. This one is for patient, long term investors.

No comments: