Two weeks ago we wrote about the underlying weakness of the Nifty IT Sector, but today we’re highlighting a stock in the space that continues to show relative strength in the face of a weak market.
First, let’s take a look at the Nifty IT Index after its failed breakout resulted in a swift 10% move to the downside. Not only was upside momentum waning as prices pushed above resistance at 16,500, but we highlighted that largest components of the sector were showing relative weakness.
It’s easy to forget that the index is comprised of individual stocks. Unless you look under the surface at what’s driving the index moves you may get caught off guard, as many did in this case.
Click on chart to enlarge view.
Now that prices are back within their 18-month range, what’s next? Well, our expectations for the IT sector hasn’t changed. The vast majority of stocks in the index are either in downtrends or have no long-term trend, so it’s no surprise that the index is settling back into a wide trading range.
Until we start to see upside participation expand, there’s little reason to expect a sustained breakout at the index level.
With that being said, in this post, we want to highlight two stocks that continue to stand out from a relative strength perspective. When most stocks are trading down to sideways, the uptrends sure do stand out.
Let’s start with Info Edge (Naukri) which is our one actionable setup at current levels. Prices have been trending higher since breaking out of a three-year base in mid-2017 and are sitting near all-time highs on an absolute basis and relative to the Nifty IT Sector.
What’s also notable is that momentum has only gotten oversold once in the last 4 years, and only briefly, signaling to us that buyers remain in control of the stock and are keeping up their aggression as prices climb to new highs.
From a risk management perspective, we like Info Edge (Naukri) because it’s consolidating above our former price objective near 2,600. Prices have respected the Fibonacci Extensions from their 2014-2017 base throughout this trend and they continue to chart a path for us. Last week sellers tried to push the stock back below 2,600 and failed to keep it there, so that remains our primary level to trade against on a closing basis.
If you want to give it more room then your risk management level can be the June 2019 highs at 2,430. This reduces your whipsaw risk and still offers an attractive reward/risk when using 3,780 as a longer-term upside target.
A close below 2,430 would call into question the validity of the stock’s strength and suggest it’s transitioning from an uptrend to a more sideways/choppy trend like many of its IT peers.
Another name that continues to trend well on an absolute and relative basis is NIIT Technologies. The problem here is that it has met our upside price objective near 2,050 and is still digesting gains, so it’s not actionable today. With that being said, we would be buying an eventual breakout above 2,050 if/when we get it, with a target up near 3,080.
A third stock worth mentioning is Larsen & Toubro Infotech (LTI), but we outlined our thoughts on it two weeks ago and think it still needs time before it’s ready to break out and begin trending higher again.
In conclusion, the Nifty IT sector is likely to continue its sideways, choppy mess of a trading range until we start to see its largest components like Tata Consultancy, Infosys, and Tech Mahindra successfully make new highs…or worse, make fresh lows and begin to trend lower.
It doesn’t matter to us which direction, but until we get a decisive breakout or breakdown a neutral approach towards the sector remains best.
With that said, Info Edge (Naukri) and NIIT Technologies continue to trend in the right direction and stave off any weakness at the sector/market level, making them likely to lead the charge higher once stocks as an asset class regain their footing.
More importantly, our risk is very well-defined and reward/risk is skewed in our favor in these two names, so let’s stick with them as we see how the broader market develops.
Thanks for reading and please let us know if you have any questions.