To The Moon

This article is authored by Kunal Rambhia, a fund manager at The Streets, a private fund. He has been in the equity market since 2010, in various roles such as Associate Research Analyst, Research Analyst, and Associate Portfolio Manager. He has media appearances with CNBC and ET NOW and is a visiting faculty in multiple colleges.

As cautioned in the last article about the market, the week turned out to be bearish. Indices declined sharply. Need to be cautious in the short-term to mid-term as correction may get extended too. When such corrections emerge, there are 2 ways to approach the market. As a short-term trader, one can initiate shorts to take advantage of price decline (with a proper risk management system in place). As an investor, one needs to keep an eye on important support areas where one can initiate positional longs (rather than buying on every dip).

Today I am discussing the formation of one of the IT giants, Infosys. So far, the entire IT sector is under stress, and prices have shown sizeable correction too. There are no signs of positive reversal on charts, but there is the possibility of further weakness. Let’s see all the observations to give a clear view of the company.

Monthly: Price action

Plotting price action on a log scale since 1999, 2 trendlines are clearly seen here. One is the resistance trendline (marked in yellow colour) from 1999 to 2020 (21 years long), which was taken out in July 2020, and the price continued to journey upward (without retesting the breakout zone). The second one is a support trendline (highlighted in white colour). Both lines have converged towards each other, and inflection area is seen on the chart. Major support is seen near 1100 (support offered by both trendlines). Even at 1100, the trend will remain bullish on the higher timeframe chart, but short-term correction may continue till then.

Weekly: Fibonacci

The last advance was from the zone of 500 to approximately 1950 zone. The advance cleared had higher tops and higher bottoms. The decline started in January 2022, and prices started making lower tops and lower bottoms. If we consider the second top near the peak as the beginning of the decline, then the downtrend is still not confirmed (will get a confirmation once the most recent bottom is taken out).

So far, prices have halted near the 38.2% correction zone. Further downside can take prices to 50%, 61.8% or 78.6% retracement zones. These highlighted areas work as potential supports and even as mid-term targets.

Weekly: Price action with pattern

From the peak, the price underwent little consolidation, forming a curve. First minor bounce from 38.2% zone and again reaching the same zone, we have inverse cup & handle formation on the chart. Breakdown of the neckline (placed at 38.2%) can take the price to nearly 825 zones which perfectly coincides with 78.6% retracement. 825 zone is also the breakout of the earlier major resistance line. Multiple positive signs near 825 create the zone as the most critical level to watch out for in case of extreme weakness.

Weekly: RSI

Momentum indicator RSI is constantly making lower tops and lower bottoms. It is clearly below 50, and more weakness is creeping in. On pattern breakdown, RSI may support the decline well and may help to achieve an extreme lower target too.

Weekly: Ichimoku

Ichimoku is a lagging indicator. The price above the cloud is clearly a bullish trend and vice versa for a bearish trend. During the recent decline, the price fell below the cloud, bounced back and found resistance from the cloud (couldn’t decisively even enter the cloud) and fell down again. The future cloud is also bearish, confirming the downtrend. Chikou span is also coming off the cloud now. Seems a perfect set-up for a positional downtrend hereon!

Daily: MACD

MACD is again one of the lagging indicators. On the daily timeframe chart (lower timeframe), the price witnessed 3 black crows formation on the last 3 candles. MACD, which was below the zero line, again witnessed a bearish crossover. Any further decline may trigger decent correction from hereon.

Weekly: Ratio chart: Infosys v/s Nifty IT

Infosys has significant weight in the Nifty IT segment. Here is the ratio chart of the stock with the index. It’s been in consolidation for a long time(2011–2012). But the consolidation is just within the trendlines highlighted on the chart. The most recent decline is right from the resistance line, confirming the likely underperformance of Infosys over Nifty IT.

Weekly: Ratio chart of Infosys v/s TCS

These two counters have been going hand in hand for years. On the weekly ratio chart, off late, there is clearly a small channel formation on the chart. Suddenly price correction started itself. This action is also highlighting the possibility of underperformance of Infosys over TCS.

Daily: Comparative chart of Infosys & Nasdaq 100

Infosys and Nasdaq 100 are plotted to overlap each other. Nasdaq generally leads the rally during the up as well as downtrends. Infosys is well following in the footsteps of Nasdaq 100. So far, there is no positive sign on the Nasdaq chart even on the daily timeframe and the downtrend is clearly continuing even on such a lower timeframe. Keeping watch on such leading indicators would also help to be alert in case of reversal. Till then, the downtrend may continue.

Putting it all together

Looking at 2 trendlines supports on monthly at extremely low levels, Inverse head and shoulders formation on the weekly chart with target aligning with 78.6% retracement and previous resistance breakout zone. Weekly declining RSI near 40 and price clearly below Ichimoku Kumo clouds (further possibility of Chikou span dropping below Kumo Cloud). MACD below zero line and giving new crossover below zero line on the daily chart along with 3 black crows formation on candles are all observations supporting further weakness in price action from short term to mid-term perspective. Weekly Infosys v/s Nifty IT chart (within symmetrical triangle and decline from resistance line), Weekly Infosys v/s TCS chart (within the channel and sudden decline) and daily Nasdaq 100 & Infosys (Infosys being lagging follower) all highlighting possibility of more weakness in Infosys in the time to come.

From a short-term to mid-term perspective, a bearish view may work well. From a long-term perspective, one can prefer to wait for those Fibonacci levels to come and accumulate as the long-term trend on the monthly chart would possibly stay up and strong even after an expected decline.

Statutory Disclosure: Kindly note that this update is only for educational purpose. It is safe to assume that my personal position, my fund’s position, my client’s position and my relative’s position may be open in the counter. Prefer to take the advice of your financial advisor before initiating any position.

This article was originally published on Blog by Tickertape on 20 September 2022.