Is Nifty IT bottoming out after falling 12% from February high?

The IT sector has been in a consolidation mode for more than a year now, especially after its robust performance between March 2020 and January 2022, when gave a massive 259 percent return, driven by a robust order book and increasing digitisation.

From January 2022 to now, the Nifty IT index has never broken its record high of 39,447 (January 4, 2022) and it has corrected 29 percent from that record high till today.

Since October 2022, it has largely been consolidating in the 27,800-31,500 range.

Twice it attempted to get back firmly above the 31,000-mark but failed on global concerns, mainly growth worries.

The index fell nearly 12 percent from its recent swing high of 31,587 on February 16 to 27,800 now, which largely coincides with the January lows, underperforming the Nifty50, which fell over 6 percent in the same period.

The IT index has been trying to consolidate around this mark (27,800) for 2-3 sessions. It looks like the index is in the process of bottoming out as the momentum indicator RSI (relative strength index 14), around 30, is already at oversold levels. This showed a small reversal today.

If it really gets bottomed out around these levels, we can say the index has formed double bottom, which is a bullish reversal pattern.

On the weekly charts, the index seems to have formed a Spinning Top kind of pattern after a consistent bearish candlestick pattern formation for five previous consecutive weeks, indicating the bears may be losing control.

“The Nifty IT index had been the strongest sector until the top made in January 2022, rising over 250 percent from the lows of March 2020 till January 2022. Such a sharp rise, followed by a 33 percent correction from the top, is a healthy sign,” Ashish Kyal, Founder and CEO, Waves Strategy Advisors, said.

Also, he says the index has formed a double bottom, with a positive divergence on indicators, suggesting that the index is now in process of forming a base before reversing back on upside.

The Nifty IT index is now trading near 28,000 with important support at 26,200. So, a short-term consolidation is possible in a broad range, but eventually, this index can again start outperforming, and any move above 30,000 will be first sign of a positive breakout, Kyal said.

What if it fails to bottom out?

If the index fails to sustain around the current level, the next crucial level to watch out for on the downside would be the gap-up area of around 27,000, followed by the September 2022 low of 26,740.

The index has already traded below all key moving averages— 21, 50, 100 and 200-day EMA (exponential moving average)— and also way below the upward-sloping support trendline, adjoining the lows of September 2022 and January 2023.

“Since May 2022, the index has been consolidating both in terms of time and price, while hovering around its 200-day EMA at 29,660. Currently, Nifty IT is testing a previous swing low, witnessed in early January of this year at 27,900-27,800. However, the index is sustaining below the 200-day EMA, which does not bode well for a bullish momentum,” Viraj Vyas, Technical & Derivatives Analyst| Institutional Equity, Ashika Stock Broking, said.

Hence, he feels if the swing low is violated, bearish repercussions may ensue, and the index may test the bullish gap placed around the 27,000-mark.

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