Bulls Lack The Bandwidth To Push Nifty IT Higher

As stocks around the globe slump, we're seeing another failed breakout attempt in one of India's largest sectors.

Let's take a look at what it means and what it's going to take for it to finally sustain new highs.

First, let's start with the Nifty IT Index on an absolute basis. Last week prices pushed above resistance near 16,500 to new all-time highs, but momentum diverged negatively and prices are now confirming a failed breakout...suggesting more time is needed to work through this overhead supply and continue its long-term trend to the upside.

Click on chart to enlarge view.

On a relative basis, the Nifty IT Index has failed to make new highs relative to the Nifty 500 since 2014 and remains stuck below that level. A sustained breakout above that level would signal a change of character and likely happen in an environment where Nifty IT stocks have successfully broken out and are trending well on an absolute basis as well.

But...before we see that these three components need to get their acts together.

Here's Tata Consultancy, representing a quarter of the index, failing once again at 2,260. There is supply at that level and price action is telling us that there's no enough demand there to absorb it and push us higher.

Until that happens, there's no reason to be long this stock and it will remain a weight on the index.

Infosys Ltd. is also a quarter of the index...and momentum is beginning to slow after a 25% + rally off its October lows. While prices are above our risk management level, we want to see momentum get back into overbought territory and any weakness towards 770 to be met with aggressive buyers. That type of action would confirm the transition from its messy 18-month range to a new uptrend.

Staying above 770 is a positive though for sure.

Lastly is Tech Mahindra, which saw a similar push back towards all-time highs, but momentum failed to reach overbought territory just like in Infosys. Until prices are decisively above 840, there's too much opportunity cost in being long the stock...however if it can get above that level with momentum getting overbought, then there's potential for a move back up towards 990. In this environment, we'd expect further sideways action before that happens though.

We're in the camp that IT eventually breaks out to the upside, but it's gonna require more patience as we wait for some of the major components discussed above to regain some upside momentum. Despite IT's problems at the sector level, there continue to be opportunities under the surface in individual names showing relative strength.