Last Updated on May 31, 2022 by Neera Bhardwaj
Kunal is a fund manager at The Streets, a private fund. He has been in the equity market since 2010, performing various roles such as Associate Research Analyst, Research Analyst, and Associate Portfolio Manager. He has media appearances with CNBC and ET NOW. Kunal is also a visiting faculty in multiple colleges.
In the most recent and brutal market correction, the IT segment took a hit alongside the Nasdaq correction despite currency depreciation. Indian IT stocks corrected over 20-45% in recent times. Let’s go through index formation after the sizeable correction to understand the undertone of the sector from a technical analysis perspective. Most of the charts are on higher timeframes to understand the sectoral outlook.
Table of Contents
Monthly: Price action
A clear trendline is plotted from 2000 until now, showing a change in polarity multiple times in the last 22 yrs. Earlier, the trendline offered support, which changed the role to resistance. The resistance line was broken in 2021, resulting in a massive upswing. Again, prices have retraced near the same resistance line, and the trendline is expected to offer support.
Alongside the trendline retesting zone, even Supertrend is offering the support. Supertrend is a lagging indicator which focuses on trend and volatility. During May, the price went well below the Supertrend but again reclaimed the support zone (so far). The candle also shows a lower wick (even testing support trendline), with a lower side rejection area. This seems a perfect “bargain buying” opportunity.
As discussed multiple times in the previous articles, Ichimoku is a lagging indicator. This shows the past, the present and the likely future in one indicator. The price went significantly away from the Kumo cloud (after taking the support during 2020). The trend remains intact so far. Price broke Tenkan Sen on the lower side, but Kijun Sen is still upward sloping, which means the extreme short-term view remains negative, but the positional trend is still intact. So, the extreme short-term behaviour can be considered a minor correction of an uptrend. The future cloud is still positive and thick enough to support a bullish view from a long term perspective. Chikou Span is clearly in an open area.
All parts of the indicator support uptrend being intact, and one should look for buying opportunities in lower timeframes.
The weekly chart shows price retraced vertical and hammer kind of formation near the previous consolidation base. Relative Strength Index (RSI) came down from extremely overbought to the trajectory of oversold. This phase of price action highlights a bullish hidden divergence where the price is still in an uptrend, but RSI is making lower lows (but decently holding up the support trendline). It seems a perfect entry zone for positional traders with an extremely favourable risk-reward ratio : )
Weekly: Fibonacci retracement
The Fibonacci ratio is applied to the previous rally to understand the correction size so far. I have created two scenarios here. In the first one, I have considered the swing from the extreme lows of 2020 to the top of 2022. We can see that the prices have just halted near the 38.2% retracement zone, which is considered a healthy correction.
Weekly Fibonacci (another swing)
In the second case, I have taken the most recent swing. We can see that the correction halted at 78.6% retracement, which is an extreme zone. But in both scenarios, the view remains neutral, and the uptrend seems intact.
Weekly: Bollinger bands
On the weekly chart, the Bollinger band is plotted. A strategy under the Bollinger band is the mean reversion strategy. In that strategy, one can initiate longs when the price is first plotted outside the band, followed by plotting inside the band. The last candle on the chart shows inside plotting and a clear rejection of the lower side (due to a long lower wick). Though we are not going to initiate position only based on Bollinger band observation, we shall keep this set up in the back of our mind to keep the approximate target of the midline of Bollinger band on paper for mid-term trading.
Daily: MACD & RSI, along with price action
The indicator is making lower tops and lower bottoms on the daily chart, confirming a downtrend so far. But by connecting the recent tops and bottoms, we can see a falling expanding wedge. The last three candles show a bullish Harami pattern with confirmation.
Alongside wedge, we also have bullish RSI divergence. An early sign of reversal is also available on MACD crossover from extreme lows.
All observations suggest “Achhe Din” soon for the sector.
Ratio Chart: Nifty IT vs Nifty
The ratio chart of Nifty IT and Nifty is plotted on the weekly chart. We can see the retesting of the support trendline of 8 yrs. Also, the retracement has been 88.6% of the last advance. This ratio chart clearly shows the underperformance of the IT sector in recent times. But as the ratio chart shows support near the present zone, there is a high possibility of the IT segment outperforming the Nifty.
Putting it all together:
After observing the monthly trendline of 22 yrs along with support offered by monthly Supertrend, Ichimoku along with strong future cloud and strong Kijun Sen, weekly hidden bullish divergence on RSI, indicates 38.2% and 78.6% retracement on two different swings. This could mean a reversion possibility based on Bollinger bands on weekly charts. Bullish divergence and MACD crossover on the daily chart. On the other hand, the Nifty IT Segment seems to have a limited lower side and huge upside potential. The ratio chart also shows the possibility of IT segment outperformance compared to Nifty.
Statutory Disclosure: Kindly note that this update is only for educational purposes. It is safe to assume that my position, fund’s position, client’s position, and relative’s position may be open on the counter. Prefer to take the advice of your financial advisor before initiating any position.
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