Thursday, July 12, 2012

Stock Chart Pattern - Infosys Ltd. (An update)

The previous technical update of the chart pattern of Infosys Ltd. was posted way back in Dec ‘09. The stock was touching new highs on a regular basis and the sky was the limit. The stock was a favourite of foreign and domestic investors and no power on earth seemed capable of stopping its growth trajectory.

A lot of water has flown down the Ganges since then, and even the best-loved companies and leaders eventually reach their level of incompetence. In the case of Infosys, the major mis-step was the decision to rotate the company’s leadership among the original group of promoters. Narayanmurthy was a visionary. Nilekani was a dynamic leader who did a great job of trying to fill Narayanmurthy’s outsize shoes.

The leaders who followed have lacked vision and dynamism. The global economic downturn couldn’t have come at a worse possible time for the company. Devoid of any worthwhile domestic business and inability to transition into high-end IT consultancy services overseas or find any useful outlets for its large cash pile has left the company struggling for direction. The culture of transparency still exists, but the company is no longer able to walk the high road of integrity. The abuse of US visa policies – indulged in by almost all Indian IT companies – have come out in the open.

The company announced cutback in hiring and froze salary increases, leading to increased attrition. The stock market has not taken kindly to the turn of events. Infosys is not, and never will be, a disaster like a Cranes Software or a Suzlon, but it no longer deserves the premium valuation that it has received for more than a decade. The daily bar chart pattern of Infosys Ltd. is steadily and inevitably descending into a bear market:


The stock touched an intra-day peak of 3475 on Jan 7 ‘11, but it turned out to be a ‘reversal day’ (higher high, lower close). The subsequent down trend is still ongoing. After forming a double-bottom at 2157 in Aug ‘11, the stock rallied sharply above all three EMAs to touch an intra-day high of 2971 on Oct 28 ‘11.

This time it formed a ‘distribution day’ pattern (open near high, close near low) and started a sideways consolidation for the next 5 months, oscillating about its 200 day EMA. All hell broke loose when Infosys announced its Q4 results in Apr ‘12. Though the company’s performance wasn’t bad at all, the market got spooked by its muted quarterly guidance of future performance.

The stock fell down with a huge gap (marked Gap 1) on massive volumes, forming a ‘panic bottom’ at 2336. After bouncing up a bit, the stock dropped even lower to 2200 on Apr 24 ‘12, which turned out to be a high volume ‘reversal day’ (lower low, higher close). The subsequent rally was weak and formed a bearish ‘rising wedge’ pattern.

A high volume gap down break below the ‘rising wedge’ (marked Gap 2) was apparently triggered after declaration of Q1 results today. Once again, the company’s performance wasn’t that bad, but the annul guidance was bleak. Better sense seems to have dawned on the management who will no longer provide quarterly performance guidance.

Though the results may have provided the trigger for the gap-down break below the wedge, remember that a ‘rising wedge’ is a bearish pattern from which the break would probably have been downwards even if Infosys had declared better results and guidance.

Knowledge of technical analysis can help investors by providing advance warning – even though technical analysis is not a science and doesn’t always follow similar previous patterns. All four technical indicators are looking bearish. A bounce up often follows such a sharp fall on big volumes, but don’t treat it as a buying opportunity, despite the fact that today’s intra-day low at 2216 is close to the Apr ‘12 low of 2200. The stock is likely to breach the Aug ‘11 low of 2157 and fall even lower.

Bottomline? The stock chart pattern of Infosys Ltd is an example of how sentiments can affect the stock of an excellent company. The company is facing some problems which are temporary in nature. It is making profits and has a huge cash pile and no debt. Wait for the dust to settle and the stock to find a reliable bottom before entering. If you are a long-term holder, there is no need to sell in a panic. But partial profit booking never hurts anyone.

No comments: