The American Depository Receipts (ADRs) of Infosys, India's second-largest IT services firm, experienced a roller-coaster ride on the US markets this past Friday. The stock witnessed a staggering intraday surge of over 56%, touching a 52-week peak, before paring most of those gains by the closing bell. This dramatic movement has set the stage for a potentially volatile week for the company's shares on Indian bourses.
The Friday Frenzy: A Technical Surge Driven by Short Squeeze
During Friday's trading session on the NYSE, the Infosys ADR price skyrocketed to an intraday high of $30 per share. This remarkable jump represented a climb of more than 56% from its previous close. However, the rally lost steam as the session progressed. The shares finally settled at $20.27 apiece, marking a net gain of 5.68% for the day.
The surge was accompanied by an explosive increase in trading activity. Data from MarketWatch revealed that trading volumes ballooned to over 3.5 million, a massive leap from the average daily volume of around 300,000 seen before this event.
Market experts were quick to point out that there was no company-specific news or fundamental trigger behind this sharp price movement. Avinash Gorakshkar, a SEBI-registered fundamental equity analyst, attributed the spike to a technical phenomenon known as a 'short squeeze'. He explained that the rally occurred amid a broader rebound in US-listed technology stocks as investors positioned themselves for the year-end.
"A short squeeze drove the sudden spike, a technical market event that forced traders betting against the stock to buy shares, pushing prices sharply higher rapidly," Gorakshkar stated.
Understanding the Short Squeeze Mechanism
A short squeeze is a market dynamic that can lead to extreme volatility. Here is a simplified breakdown of how it unfolds:
- Short Selling: Investors borrow and sell shares, anticipating the price will fall so they can repurchase them later at a lower cost.
- Unexpected Price Rise: Contrary to their bet, the stock price begins to rise significantly, causing losses for those who shorted it.
- Forced Buying (Margin Calls): To limit mounting losses, brokers may force short sellers to buy back the shares immediately.
- Feedback Loop: This wave of forced buying pushes the price even higher, triggering more short sellers to cover their positions.
- High Volatility: This cycle often results in rapid and severe price swings, sometimes prompting trading halts.
Implications for Infosys Shares on BSE and NSE
All eyes are now on how Infosys shares will perform when trading resumes on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) on Monday. Analysts predict that the positive sentiment from the ADR movement will spill over to Dalal Street.
"The sentiment is definitely up, and bulls are expected to take advantage of this positive sentiment. A gap-up opening for Infosys shares on Dalal Street is highly likely," said Gorakshkar. However, he added a note of caution, indicating that the strengthening Indian Rupee (INR) against the US Dollar, partly influenced by the Bank of Japan's policy decision, might cap the extent of the rally in India.
Providing a technical outlook for the ADR, Anuj Gupta, Director at Ya Wealth, noted the formation of a bullish breakout pattern supported by high volumes. "Prices are expected to rise further due to this bullish breakout... It has strong support at $17 and then $15, and resistance at $25 and $30 levels. As per the technical structure, it may test $25 to $30 levels again in the coming time," he explained.
While the short-term technical picture appears buoyant, investors are advised to note that this specific surge was not rooted in any change to Infosys's business fundamentals. The event underscores the impact of technical factors and market mechanics on stock prices, especially in the short term.
Disclaimer: This article is for informational purposes only. The views and recommendations mentioned are those of individual analysts. Readers are strongly advised to consult with certified investment experts before making any financial decisions.
