Case Study: Infosys
Period: Jan 2020-Dec 2021
This is Infosys weekly chart
Infosys stock used to trade below 850 levels (Point 1) and it was the line of resistance.
Then covid happened in Feb 2020 and the stock sold off to 510 levels by March end. (Point 2)
Global markets bottomed out back then and staged a recovery. Infosys stock also saw a sudden reversal and to everyone’s surprise, made a new high above 850 in July 2020. The breakout to a new high had set the stage for a breakout run (Point 3)
Price Action always has a strong story behind it. This was the Infosys story in July 2020 and the driver behind the breakout
Infosys market cap: $50 billion
Zero debt
Cash and investments ~ $3.8 billion.What’s heartening – India’s frontline IT companies now well-positioned to play the Digital transformation game
— Deepak Singh (@smarket) July 16, 2020
When a stock makes a new high, it’s a signal that everyone is excited about the company’s future prospects and the enthusiasm just grows with time. Every minor dip is bought. What you see on the chart is a close approximation of the 20-week moving average (Point 4)
Over the 1.5-year period, Infosys stock doubled in Value and reached highs of 1900+ by Dec 2021(Point 5)
Fundamentals always show up on the chart
Everybody was bullish on Tech stocks in Dec 2021 and then you started hearing about changing fundamentals
I am no longer bullish on Large Cap Tech stocks. The price action remains bullish but it will be hard for the stock to outperform.
Wage Bill Inflation is now out of control for most of the large companies.
— Deepak Singh (@smarket) December 30, 2021
The stocks don’t react to fundamentals instantly but you start getting the hints. Infosys stock started trading sideways and even at that point everything looked fine.
Every stock is trying to do something. Reading Price Action is all about evaluating that behavior.
Example: Infosys since August has been trying to hold 1660 and only once tried bouncing. It did bounce 15% but then it’s back to the same support zone
Stock is doing nothing pic.twitter.com/HAhn93Z4lr
— Deepak Singh (@smarket) February 28, 2022
And then came a dramatic Gap down in April on earnings announcement and it started the real downtrend in the stock
Infosys underperforms on the earnings front. It’s not surprising. The disruption in the IT Labour market is beyond comprehension.
— Deepak Singh (@smarket) April 13, 2022
Here’s the daily chart – look at the Gap down – Point 2
Post Gap down, the stock declined to 1350 by June 2022 (Point 3) and the support of 1650 became the new resistance (Point 4). So, fundamental warning at 1900 levels in Dec 2021, the stock was down to 1400 by Sep 2022. It was a decline of 26%
When a stock is in a downtrend, then one should avoid the stock till we see clear evidence of a turnaround
Infosys stock post gap down created a Line of resistance at 1650 (Point 1, Point 3) and a Line of Support at 1350 (Point 2). Again in April 2023, the stock Gapped down below 1350 (Point 4) and the downtrend continues
Source: Chartalert.com
The Big Picture
Any stock offers the best opportunity when a fundamental is leading to a turnaround or breakout. During such periods, stocks can double in 12-18 months but when the dark clouds gather, then the stock can best trade sideways or be positioned to break down, and one is better off staying away during such times. Reading Price Action is a fascinating game if you spot fundamentals on the chart than mechanical indicators. Charts always tell a story provided we listen.
Learn Science of Stock Price Action
Fundamentals don’t drive stock prices.
How people perceive those fundamentals drive stock prices.
As a market participant/trader, keep an eye on how the market views the fundamentals than being obsessed with your own version of fundamentals. It means look at the price action and it tells you without bias what the market thinks about the stock. Once you read the price action, go and find the reason why the market has such a view on the stock, and be aligned with it.
This is the level one mind training every individual requires to be in sync with market thinking. This is the real fundamental of Investing. I call it Science of Stock Price Action
If price action fascinates you – then Science of Stock Price Action is a great place to start. I only cover Indian stock market here.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purposes. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers