I hope you took advantage of last week’s advice to look at Jabil Circuit (JBL). The company blew away earnings expectations when it reported Tuesday — in fact, JBL doubled the analyst estimate — and the stock spiked higher by as much as 9% Wednesday morning.
The stock I want to discuss today is Infosys Technologies (INFY), an India-based IT services company that reports earnings on Friday Oct. 9.
Technically, the stock is enjoying a monster run-up from the March bottom, more than doubling in a series of higher highs and higher lows.
The rally has been supported by both the 20-day and 50-day moving averages, although the 20-day (red line below) is currently in play. The shares enjoyed a strong bounce off the 20-day Wednesday, and now look to take out the 16-month high at $50 reached last week.
Speaking of the $50 level, this could present a problem for Infosys. That area marked a peak in May 2008, and is proving once again to be troublesome. One reason may be heavy call open interest at that strike. Such strikes often create resistance points that prove difficult to overcome.
An attractive feature of a bullish trade in Infosys is the pessimism we’re seeing toward the stock. Just six of 14 covering analysts rate the equity a “buy,” leaving ample room for upgrades. But this is a more bullish configuration compared to three months ago, meaning that skepticism among analysts is unwinding. That’s a good sign for the bulls.
INFY’s put/call ratio is on a steep rise, an indication of rising pessimism. The ratio has surpassed a peak from August that marked a bottom in the shares. This is just another sign that plenty of fear is waiting to unwind into buying pressure.
As for earnings, analysts expect an 11% decline in profits for the second quarter. But this may be setting the bar too low, as Infosys has improved profits an average of 8% for the past four quarters. An upside surprise, which may not be difficult, could send the stock past the stubborn $50 mark.
We have more than a week until earnings come out, so watch how the stock behaves as the key 20-day moving average and $50 level continue to converge. A breakout one way or the other is practically inevitable, and earnings could very well be the key.
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