The following comment was made in the previous technical update to the stock chart pattern of 3i Infotech: “There is every possibility of the stock price falling below 25 and turning into a penny stock.” Was it clairvoyance? Hardly. The extremely bearish technical indicators and a price chart that was falling like a stone gave ample indications.
The significance of the 25 level – which was the previous bear market low touched in Mar ‘09 - can be seen in the chart below. Shortly after the previous post in Aug ‘11 (date marked by grey vertical line in chart), the stock price dropped to 25 only to bounce up above the falling 20 day EMA on Sep 9 ‘11. The stock price managed to remain above the 25 level for the next 2 months before finally falling below on Nov 11 ‘11.
After falling to 12 in Dec ‘11, the stock started a 2 months long rally that coincided with the rally in the broader market. Consolidating within a bearish ‘flag’ pattern, the stock price reached an intra-day high of 22 on Feb 17 ‘12. But it turned out to be a high-volume ‘reversal day’, which ended the rally. That was the closest the stock price came to the 25 level.
The daily bar chart pattern of 3i Infotech is an example of the unfolding of a bear market with occasional counter-trend rallies that provide exit opportunities. The falling 200 day EMA has not been tested even once since the previous post.
In Jun ‘12, the stock price dropped below 10 and became a ‘penny stock’. A brief rally on fairly strong volumes took the stock price above its 20 day and 50 day EMAs as well as the 12 level for a few days. But the force of gravity towards ‘penny stock’ status proved too strong.
For nearly 4 months, the stock price has been trading within a rectangle pattern from which it is showing signs of emerging. Volumes have shot up and the stock price has been hitting the 5% upper circuit for 5 days. This is a stock held mostly by small investors, many of whom entered at higher levels.
Is the worst over? Is this a good opportunity to buy? Not really. Three of the four technical indicators (ROC, RSI, slow stochastic) are looking overbought. Even if the price breaks out above the rectangle, strong resistance is expected from the falling 200 day EMA and the 12 level.
Fundamentally, the company has managed to stave off bankruptcy by arranging a corporate debt restructuring (CDR) – by keeping the bankers at bay through an allotment of equity shares at a premium to current price. Outstanding FCCBs have also been converted into equity shares at a premium. While equity capital has become bloated, interest costs will be lower. That may be the reason for recent market euphoria.
Bottomline? The stock chart pattern of 3i Infotech is mired deep inside a bear market. Top line is sliding and bottom line is red. Over-leveraging in a bid to grow fast has ruined the balance sheet. Stay away. If you are stuck from higher levels, use any rally to exit.