Give Indian IT Stocks More Room On The Downside

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 |  Includes: INFY, WIT
by: Ramki Ramakrishnan

If you are an investor in Emerging Markets, you already know the risks. Any unpleasant surprise could actually turn nasty. Take for example what happened today to shares of Infosys Technologies Limited (INFY). The company is considered an IT bellwether, and is a darling of investors everywhere. It is India's second-largest software services exporter. But today, at one time, the stock was down by over 10%.

Some of the reasons for this sharp sell-off include the following: (1) The company has seen a "ramp down" in orders from various accounts and especially in the financial services sector. This was to have been expected given the continuing turmoil in that sector; (2) Growth in fiscal year 2013 is expected to be lower than what even the pessimists had expected, and (3) The next quarter's profit margin will be lower by at least 200 basis points compared to March 2012. This comes on top of the company missing revenue guidance for the March 2012 quarter.

The chill wind that is blowing on the IT segment has not spared other players. Wipro Limited (WIT) for example, is down by over 4%. Tata Consultancy Services is down almost 5%.

Could we have got some clue about these share price movements using technical analysis? My answer is yes. I use Elliott Wave analysis to figure out if a company is a good candidate to invest in. For example, I have been bearish on Wipro since February 2012, and am looking for a dip to INR 380. The stock topped out at INR 453 in February, and then Goldman Sachs downgraded it to a sell. Naturally it came off immediately in a knee-jerk reaction. But using Elliott Waves, it was possible to have exited the stock around INR 440. Tata Consultancy is another key player in the IT sector. I have been bearish on that as well.

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As an investor in emerging markets, it is very important to wait for a sweet spot before committing money. When a strong company - like Infosys Technologies Limited, or Wipro Limited - shows signs of weakness in its charts, it might be a good idea to sit on the sidelines while the stock works its way to the downside target.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.