RESEARCH METHODOLOGY

The study aims to analyse the price movements of the INFOSYS script. As the study
describes the facts and figures existing in the financial statements and price movements of
INFOSYS, the design of the research followed is descriptive and analytical in nature. For
technical analysis, secondary data, the movements of the 14-day stock price of INFOSYS in
NSE were absorbed over the 6 years, i.e. August-2013 to August-2019. Closing prices of
stock prices were taken and future price developments were analysed using technical
indicators such as the relative strength index (RSI) and the divergence and convergence of the
moving average (MACD). The data was collected during stock market trading on NSE and
various websites.

The methods used to analyse securities and make investment decisions fall into two main
categories: fundamental analysis and technical analysis. Fundamental analysis consists in
analysing the characteristics of a company to estimate its value. Technical analysis takes a
completely different approach; He doesn't care about the "value" of a business or a
commodity.

Despite all the elegant and exotic tools it uses, technical analysis really studies only the
supply and demand in a market to determine direction or trend that will continue in the
future. In other words, technical analysis attempts to understand the emotions of the market
by studying the market itself, rather than its components.

Data collection
After reviewing the literature on Infosys' current financial crisis and the determinants of its
business performance, I get the general idea and decide on the appropriate independent and
dependent variables to measure the business performance that affects the stock market.

Later, I did a technical analysis based on two technical tools RSI and MACD. Data for these
tools is collected on the NSE website, a database that provides financial and stock market
information.

Data collection is based on :

-NSE website

-Research papers

-Infosys website

-Moneycontrol website

What is the technical analysis?

Technical analysis is a method of assessing value by analysing statistics generated by market
activity, such as past prices and volume. Technical analysts do not try to measure the intrinsic
value of a value, but rather use graphs and other tools to identify patterns that may suggest
future activity. Just as there are many styles of fundamentally investing, there are also many
different types of technical operators. Some are based on graphic patterns; others use
technical indicators and oscillators, and most use a combination of the two. In any case, the
exclusive use of technical analysts of historical price and volume data is what separates them
from their fundamental counterparts.

Unlike fundamental analysts, technical analysts don't care if a stock is undervalued: all that
matters is the historical trading data of a security and the information that such data can
provide about where security might evolve in the future.

Technical Analysis: The Basic Assumptions

The field of technical analysis is based on three assumptions:

1.     The market discounts everything.
2.     Price moves in trends.
3.     History tends to repeat itself.

1. The market discounts everything:

An important criticism of technical analysis is that it only takes into account the price
movement, ignoring the fundamental factors of the business. However, technical analysis
assumes that the price of a share at all times reflects everything that has affected or could
affect the company, including the fundamental factors. Technical analysts believe that the
fundamentals of the business, as well as the broader economic factors and market
psychology, are included in the stocks, eliminating the need to consider these factors
separately. This leaves only the analysis of the price movement, which technical theory
considers as a product of the supply and demand of a particular action on the market.

2. Price moves in trends:

In technical analysis, price movements are believed to follow trends. This means that after a
trend has been established, the future price movement is more likely to go in the same
direction as the reverse trend. Most technical trading strategies are based on this assumption.

3. History tends to repeat itself:

Another important idea from technical analysis is that history tends to repeat itself, mainly in
terms of price movement. The repetitive nature of price movements is attributed to market
psychology. In other words, market players tend to provide a constant reaction to similar
market stimuli over time.
Technical analysis uses graphical models to analyze market movements and understand
trends. Although many of these charts have been in use for over 100 years, they are still
considered relevant as they illustrate trends in price movements that are repeated often.

TECHNICAL TOOLS:-

RSI:-

Another of the most commonly used and known momentum indicators in technical analysis is
the relative strength index (RSI). It is used to indicate the conditions of overbought and
oversold in a security. The indicator is set between a range of zero to 100, where 100 is the
highest overbought condition and zero is the highest oversold condition. This indicates
whether a security has been under increased buying or selling pressure during the trading
period.

The classic form of the RSI

The RSI is a commonly used oscillator in technical analysis because of its ease of use and
interpretation. The RSI involves comparing the increase of the closing prices with their falls
within a certain period of time. The term is often used to highlight the relative strength of a
security in relation to the market on which it is traded or with a different security. To
determine the RSI, the increase of the closing price (upward change) (U) or the decrease of
the closing price (downward change) (D) are calculated for each day, according to Formulas
(1) and (2).
close today yesterday U = close − close (1)
close yesterday today D = close − close (2)
If U is positive for a certain day, then D is replaced with 0 for that day and vice versa, if D is
positive for a certain day, then U is replaced with 0 for the respective day. The determination
of EMA requires the calculation of a simple arithmetic average (SMA) of the data for the first
N days in the string under consideration, according to Formula (4).

SMA= X1+X2+…..+Xn/ N

Where: SMAn - the arithmetic average of a string of data corresponding to a number of N

days; Xn - the value corresponding to the N day from the data string. When determining RSI
X = U or X = D.

The exponential moving average of the N+1 day is determined as follows (previously used
notations are maintained):

EMAn+1 = alpha*Xn+1 + (1- alpha) * SMAn

After determining the exponential moving averages of the U closing prices increase Formula
(6) which represents the relative strength (RS).

RS = EMA of U/EMA of D (6)

It is converted into an index which can range between 0 and 100 units, calculated according
to Formula (7) and called the relative strength index (RSI).
RSI = 100-100*1/(1+RS)

Generally, when the RSI exceeds the value of 30 units from bottom to top, it is considered a
buy signal and when it exceeds the value of 70 points from top to bottom, it is considered a
sell signal. In other words, when the RSI has values below 30, the underlying asset based on
which the price is calculated is oversold and when it has values over 70, the underlying asset
is overbought. For highly volatile markets certain technical analysts recommend the use of
the levels of 20 and 80 units instead of 30 and 70 units, as signal levels. Some traders
recommend the use of the RSI only for the buy signals in an uptrend market (bull market), or
only for the sell signals in a downtrend market (bear market).
The RSI average level is of 50 units. Another interpretation of the indicator indicates that
when it exceeds this value from bottom to top it indicates the emergence/ continuation of an
upward trend (bullish trend), and when it exceeds this value from top to bottom it indicates
the emergence/ continuation of a downward trend (bearish trend). This interpretation results
from the RSI calculation formula. When it has values over 50, the average gain from the last
period is higher than the average loss. In the reverse situation the indicator has values below
50.

MACD:-

A simple moving average is calculated by taking the average of prices over a specified period
of time. Normally the closing price of stock is used in the average calculation (Murphy,
1999). The five day moving average means taking five days stock prices, summing it and
then dividing the total by five. As mentioned above, the moving average keep changing every
new day. Comparison of 3 days SMA and 5 days SMA on NIFTY from AUGUST 2013 to
AUGUST 2019.

Exponential Moving Average

The lag can be reduced by exponential moving averages to recent prices. It can be calculated
in three steps. Firstly calculate the simple moving average as seen above. Secondly, perform
the calculation of the weighting multiplier. Finally, calculate the exponential moving average.
The formula and calculation of 10-day EMA are given below.

First Step:

EMA: 12 Period Sum/12

Second Step:

EMA: 26 Period Sum/26

One of the best known and most widely used indicators in technical analysis is the divergence
of convergence of the moving average (MACD). It is used to indicate both the trend and the
momentum behind a title.
MACD is an indicator that shows the relationship between two moving average prices. To
calculate the MACD, subtract the 26-day EMA from the 12-day EMA. Next, an EMA is
drawn with 9-day MACD points called the signal line at the top of the MACD.

CALCULATION

MACD = Short term EMA – Long term EMA

Bollinger Band (BB): -

The indicator was developed by John Bollinger, Bollinger Bands are volatility bands placed
above and below a moving average. Volatility is in price based on the standard deviation,
which changes with volatility increases and decreases. The bands automatically widen when
volatility increases and narrow when volatility decreases in price. It basically takes average of
20 days for calculation of band. There is three type of band are middle, upper and lower band.

There are three lines in the Bollinger Band,

 The middle line with N-period moving average (MA); 20-day SMA

 An upper band at K times an N-period standard deviation above the moving average;
20-day SMA + (20-day standard deviation of price x 2)
 A lower band at K times an N-period standard deviation below the moving average;
20-day SMA – (20-day standard deviation of price x 2)

The bands consist of two components, a simple moving average (SMA) based on an N-period
and an upper and lower limit derived as K times the standard deviation of the volatility.
Historically, the value for N is 20 and 2 for K. Theoretically, 95% of data would fall within
two standard deviations of the SMA but due to nonrandom and nonstationary price action,
this is not necessarily true.
Bollinger Bands work best to indicate the beginning of trends when the upper and lower
bounds are crossed. When a security’s price reaches above the upper band, it is considered
overbought and below the lower limit means the security is oversold (Leung & Chong, 2003).
An overbought security should be sold or shorted and an oversold security should be
purchased.

LIMITATIONS OF THE STUDY

-Technical analysis only for 3 years is undertaken; from this data we cannot predict prices
accurately.

-This study can be used only for short term decision making.

- The market is volatile, sometimes these tools does not measure accurate price movements.