Stock Chart Pattern - 3i Infotech Ltd (An Update)

If the stock chart pattern of 3i Infotech was a Bob Dylan fan, it may have been singing - “Can this really be the end, to be stuck inside of a channel with the down trend blues again”. But that song could not have lasted beyond the third week of May ‘10.

That is when the chart dropped below the down trend channel, and fell all the way down to the long-term support level of 60. But that is telling the story from Chapter 9. So let us start at the beginning, by taking a look at the one year closing chart pattern of 3i Infotech:

The bull rally in the stock from the bear market low of 25 (made in Mar ‘09), ended with two intra-day tops at 103 in Oct ‘09. Though the 312% rise may seem spectacular, it only retraced 56% of the bear market fall from the peak of 165 (touched in May ‘07).

By failing to go past the 61.8% Fibonacci retracement level of the 140 points fall (from 165 to 25), the stock technically remained in a long-term bear market – in spite of the fact that it was way above its 200 DMA when the correction began in Oct ‘09.

The stock moved within a down trend channel (bounded by the lines marked C and C’) from Oct ‘09 till the third week of May ‘10. From Jan ‘10 onwards, the stock’s decline became steeper – as marked by the down trend line D.

Note that the line C’, which had acted as a support, was touched 3 times. The first was in Nov ‘09, when the stock bounced all the way up to the line C in Jan ‘10. Thereafter, the line D became the resistance line. The second support on C’ occurred in Feb ‘10. This time, the upward bounce went only as far as the 200 DMA.

Further up move attempts were thwarted by the falling 20 and 50 DMAs and the down trend line D. The third support on C’ happened in early May ‘10. The short bounce stalled at the falling 20 DMA and the line D.

Now here comes an interesting part. As the stock fell below the line C’ and went lower, the MACD and RSI made higher lows and the slow stochastic made a flat bottom. Such positive divergences in all three technical indicators led to a brief up move after the stock found support at 60.

The first leg of the short up move went past the 20 DMA, the down trend line D and the 50 DMA before encountering resistance from the previous support line C’. As the stock corrected (in Jul ‘10), it twice received support from the down trend line D. Classic instances of how supports turn into resistances, and vice versa.

The second leg of the up move crossed the 50 and 20 DMAs as well as the line C’, but reversed after hitting the level of 68. Note that as the stock made a higher top, the RSI and slow stochastic made lower tops. The negative divergences pulled the stock chart down below both the 20 and 50 DMAs once more.

The fundamentals of the company has deteriorated – thanks to the huge debt burden, and the bottomline turned red in the year ending Mar ‘10. The business model can’t be faulted, as it is generating positive cash flows from operations. But the management’s growth strategy through leveraged acquisitions has badly affected the balance sheet.

Bottomline? The stock chart pattern of 3i Infotech is an example of what can happen if the growth ambitions of management exceed their execution capabilities. In my earlier post, I had recommended a stop-loss at 70. If you are still holding the stock, get out at the earliest opportunity. The stock can fall much lower.

[Note for readers: Several other companies have followed the ‘growth through leveraged acquisitions’ strategy. Do you know of any such companies? Can you share their names? Are you stuck with losses in such companies?]