Sector Rotation's Next Benefactor - Information Technology?

January 17, 2020

The Large-Cap indices continue to churn near the highs as Mid and Small-Cap stocks play catchup. Sector leadership remains clear, but we're now beginning to see signs that a former leader turned laggards may start heating up again.

Earlier this week we looked Consumer Goods before they broke out and Technology looks to be showing similar signs of buying pressure.

Let's take a look.

Here's the Nifty IT Index attempting to break back above 16,200 resistance as momentum finally breaks back into overbought territory. If prices can break decisively above resistance then this long-term uptrend could accelerate and target 18,775 over the next few quarters.

Click on chart to enlarge view.

The primary driver of this breakout is going to have to be its two largest components, Tata Consultancy and Infosys, which each make up 25% of the sector index.

Tata Consultancy looks exactly as the Nifty IT Index. A breakout above 2,260, or better yet 2,300, would signal the continuation of its long-term uptrend and target 2,700.

Infosys Ltd. has been a choppy mess, but if prices can get back above 770 with momentum getting overbought, that would suggest to us that buyers are back in control. Longer-term if prices can stay above that level then our long-term target is up near 980.

If IT stocks are going to benefit from sector rotation and break out, these two stocks have to be leading the charge. Keep an eye on them.

In the meantime, there are two other stocks offering attractive reward/risk entries should this thesis play out.

Here's Info Edge, which is set up again after reaching our target near 2,600. A breakout above 2,740 would offer a long entry and target 3,780.

Here's Larsen & Toubro Infotech building out a base below 2,000. If prices can consolidate a bit more and then break out above 2,000, then we can be long with a target near 2,380.

If the market is going to make new highs, we participation to broaden. The price and momentum improvements in these IT names may be the start of just that and offer attractive reward/risk entries at current levels.

There's not quite as much participation as there was in Consumer Goods, but the reward/risk is skewed enough in our favor that it's worth a shot.

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team