Saturday, February 23, 2013

INFY: Fails the odds test for recent breakouts

The Bangalore, India tech company Infosys Ltd. (INFY) broke above its combined 20- and 55-day high for a second time since mid-January, when a 5.5% earnings surprise prompted a quantum leap in price.

The first breakout, on Jan. 23, was unconfirmed, as the price closed below the breakout level. The second breakout, above $52.84 on Friday, awaits confirmation in Monday's trading. The price in the second instance peaked at $53.93 and then pulled back, but still closed above the breakout level.

INFY has broken beyond the 20-day price channel 70 times in the past four years. Of the 40 breakouts to the upside,  55% produced profits, with an average yield of  7.5%. Adjusting the yield for the success rate produces a score of 4.1%, slightly below the 5% level that I prefer.

In the past year INFY has broken out eight times to the upside, with only two successes.

At this point I can end my analysis. A high four-year success rate that is unconfirmed by the past year's success rate is a deal killer.

A look at the longer-term chart trends confirms the wisdom of caution, but also suggests guarding against over-caution.

INFY is prone to sudden moves on high volume, but it has been trading a series of lower highs and lower lows since January 2011.

However, the most recent quantum leap carried the price to a higher high compared to the prior swing high. So, by the book, it looks as though it could be a trend reversal, but it would take a break above the $61.48 high set in October 2011 to nail it.

Bottom line: I can wait. If INFY truly is reversing its trend, there will be future breakouts that will bring the trailing year's success rate up above 50%.

INFY was one of 29 breakout among my universe of 1,848 stocks analyzed from Friday's session. The universe was composed of stocks and exchange-traded funds rated by the ratings aggregator Zacks with an average volume the past 10 days of 1.5 million shares or greater and a breakout success rate in either the bull or bear direction of greater than 50%.

Three stocks were excluded because they had earnings within the next 30 days, and the rest failed to show a success rate of greater than 50% from breakouts in the same direction as Friday's.

INFY was the sole survivor meriting further analysis.

Decision for my account: I won't open a bull position on INFY because its breakouts the past 12 months have failed to show a sufficiently high success rate, above 50%.


My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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