Once in a while we generally see F&O counters crashing to their 10% lower circuit (LC) however, it's a very rare event for a market giant such as Infosys (NS:INFY). This IT behemoth took a serious hit at the opening tick, falling 10% to INR 1,250.3 as investors hurried to exit their holdings after some shocking Q4 earnings updates from the company. This is the first lower circuit for the company after the Covid-19 bottom on 23 March 2020.
The company posted a 3.2% decline in QoQ revenue (constant currency) and margins contracted by 50 bps QoQ. Although profits are up 8% YoY to INR 6,128 crores, it also missed the estimates. What worked as a catalyst for the fall was brokerages’ heavy downgrades with severe cuts to price targets. As the stock is perceived as a bellwether of the IT sector (along with TCS (NS:TCS)) in India, the entire IT space is bleeding currently.
Image Description: Daily chart of Infosys with the RSI and volume bars at the bottom
Image Source: Investing.com
The Nifty IT index cracked 6.63% to 26,455, by 9:30 AM IST. Persistent Systems (NS:PERS) is down 9%, LTI Mindtree (NS:MINT) fell over 8.5%, Tech Mahindra (NS:TEML) tumbled over 7% etc. There is no hope seen in the IT sector in today’s session at least. Coming to our main focus, what should you do with Infosys?
First of all, a 10% gap down opening does not give a good risk-to-reward ratio to go short, despite the broader trend being extremely negative. There’s no way traders can trade such extreme volatility with a small stop loss. I would prefer to find a bottom and then go long which could be more beneficial. For finding a bottom, my personal favorite is the formation of a bullish divergence. Hammer candlestick, Doji, Morning star candlestick pattern and the likes can also be a good indication for a quick reversal.
The stock is extremely oversold with the RSI (daily, 14) showing a reading of 22.8, which is the lowest since April 2022. So basically, you can say the current downside momentum is the strongest in over a year, which has made this counter highly oversold.
So definitely a bounceback could come from here. Playing through options with proper hedging is better than long futures, such as a bull call spread. This big gap left on the chart generally gets filled in the case of a large cap. Long-term investors can definitely seize this opportunity to add this counter to their portfolios. Short opportunities can be exploited once the retracement gets complete around INR 1,370.
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