One of the major advantages of Reading Price Action: It helps you spot the inflection point where investors dramatically change their Perception about a stock/sector. And I can share a countless number of case studies that how a change in PErcpetion leads to dramatic stock rallies. Here’s an Infosys case study to understand this process.
Infosys Price Action Case Study
The Phase of Underperformance
There are times when the stocks/sectors have no inherent strength and they just bounce around with the market. Indian IT sector was in that space between Jan 2020 and June 2020. One can clearly see that in the Infosys chart.
Source: Chartalert.com
As you can see in the chart above, Infosys stock used to trade near 800 around Feb 20-24 (Point 1) when the covid sell-off happened and the stock declined to levels near 520 by the March 23rd (Point 2) and bottomed along with the Nifty. Then the stock bounced with the Nifty and stalled at 200 dma/720 levels (Point 3). At that point in time, it was a dead cat bounce. Infosys was trading below a well-defined resistance of 720 levels and 200 dma and there was nothing exciting about the sector/stock perse. No wonder I tweeted about the lack of excitement for the sector on June 22, 2020
Events Change Perception
Fundamentals don’t drive stock prices. How people perceive those fundamentals drive stock prices. And people’s perception change when something dramatic happens
Accenture posts strong quarterly earnings numbers
Stock Up 6%The company says the future looks good as companies digitize processes 👏👏👏
— Deepak Singh (@smarket) June 25, 2020
On June 25th, Accenture came out with a strong earnings report and it dramatically changed the Perception of the investing community towards the sector. Lots of people who were bearish on the sector got a big reality check. Infosys stock broke past dead cat bounce resistance of 720/200 dma and kickstarted a new bull market.
Source: Chartalert.com
Infosys stock climbed above pre-covid high a day before earnings on July 16 2020
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
Infosys stock came out with brilliant earnings on July 16 2020
Infosys earnings 👏👏👏
“Our revenues grew at 1.5% year-on-year in constant currency terms. Digital revenue grew at 25.5% year-on-year in constant currency and now accounts for 44.5% of our revenue.” ~ Salil Parekh
Digital revenue…hmm 😉
— Deepak Singh (@smarket) July 16, 2020
Infosys opened with a huge gap up and the stock was at all-time high. The stock then consolidated and rallied to 1180
Source: Chartalert.com
As you can see in the chart above, Infosys stock peaked at 1180 by October 15 (next quarter earnings date). A Large candle selling does create short term peak and no wonder Infosys stock went nowhere and looked for the next source of trigger which again came in form of Accenture earnings a week back.
Infosys stock is now up 65%+ since June end and if you look back – it was the Accenture earnings during the middle of pandemic that changed the trajectory of the stock.
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.
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