(This article was published on TheStreet.com on August 21)
Shares of Infosys Technologies (INFY) dropped 13% in Friday’s session after CEO Vishal Sikka resigned amidst continuing criticism of his stewardship and compensation from company founders. The drop took the stock price down to test its 200-day moving average and the support line of a rising channel pattern it had been trading in for the last nine months. A massive spike in volume, more than 400% greater than the 50-day moving average of volume, powered the decline, and suggests institutional level distribution.
When a stock makes a strong percentage move in price, it’s a good idea to put it in technical perspective by using weekly charts. The weekly chart of Infosys shows the stock rally up off its 2013 low to its 2016 high in a large rising channel pattern. It moved below its 40 week moving average in July last year and then broke through channel support, continuing lower into year end. The 38% retracement level of the three-year rally range supplied support in the $13.60 area, which was also the diagonal channel pattern price projection.
The stock then began forming a smaller fractal version of the previous rising channel pattern and Friday’s sharp pullback took it back down to test that channel support. The relative strength index has crossed below its 21-period moving average and centerline, reflecting the sharp reversal in the direction of momentum, and the accumulation/distribution line and Chaikin money flow have crossed below their signal averages, reflecting negative money flow. The Bollinger bandwidth reading is an indication of contraction in the bands that often is followed by rapid expansions, and suggests there’s further volatility ahead.
A breakdown from the smaller channel pattern seems likely at this point, and it projects a target objective in the zone of support identified by the long-term uptrend line and the 38% Fibonacci retracement level, in the $13.75 level to the $13.50 area. This would be another move similar to the one in Friday’s session of approximately 7% more to the downside.