Some divergences remain at the index level, but with the Tech-heavy Nasdaq 100 breaking out to new highs…the question is will we see the same rotation back into Technology stocks globally?
In this post, we’re taking a look and identifying the best reward/risk in the sector right now.
In yesterday’s post we talked about the difficulty in identifying stocks with well-defined risk after such a strong run in November. In the US and in India the Technology sector has cooled off over the last few months and is now approaching new highs, providing us with some opportunities on the long side once again.
Let’s take a look at the Nifty IT daily chart. We’ve liked Technology stocks as a group since their breakout in July and beginning in October prices began consolidating above our price objective of 20,275. The strongest trends tend to consolidate above their price objectives rather than below them…and this chart is certainly proving out that theory.
Click on chart to enlarge view.
And here’s the sector on a relative basis, pulling back slightly, but still in a structural uptrend after its July breakout to new highs.
Now that we’ve confirmed that buyers remain firmly in control in the IT sector, we want to be looking to re-enter or add to individual stocks in the group where our risk is well-defined.
First up is HCL Technologies, which has stabilized above 795 and is starting to turn higher. As long as prices are above that level, we want to be long with a target of 1,033.
Infosys has consolidated well above 1,065 and looks ready to break out. If we want to be aggressive with our risk management, we can enter on a break above 1,160 and use that as our line in the sand. Otherwise, the trend remains higher as long as our former price objective and recent pivot low of 1,065 remains intact. Our target remains 1,395 on the upside.
Tata Consultancy remains positive as long as prices are above 2,590 and our target is up near 3,090.
Tech Mahindra is breaking out to new highs. As long as prices are above 815, then this breakout is intact and we can look for 1,080.
LTI is attempting to make new highs. If prices are above 3,420 we can be long with a 4,785 target.
L&T Technology Services is going for another breakout attempt. A successful close above 1,800 would signal the start of its next leg higher towards 2,285.
Mindtree Ltd. looks ready for its next leg higher. As long as prices are above 1,280, the bias is higher towards 2,045.
Mphasis continues to dig in above its former highs of 1,250. If prices are above that level, the bias is higher towards 1,690.
Tata Elxsi held its breakout level and is moving towards new highs. As long as prices are above 1,460, the bias is higher towards 2,050 and 3,010.
Last on our list is a catch-up play in Take Solutions. The stock is trying to stabilize above long-term support near 36 as momentum diverges positively. If we look at the stock relative to the Nifty Small-Cap 100 Index as well, it’s back down towards a decade-long support level.
If it was ever going to reverse higher, it would be from here. And our risk is well defined. If the stock is above 36, we can be long with a longer-term price objective near 92.
These factors, combined with well-defined risk on an absolute basis, give us the confidence to get involved at current levels despite the major indices being extended in the near-term.
In the event that the market does pull back, these stocks should continue to hold up well given their long-term trends are positive and institutions will likely use that weakness to add to positions.
And in the event that the market continues to trend higher in the face of short-term over-optimism, these stocks should catch a bid and lead given they’re not as extended as many other areas of the market.
That’s what we like to call a win/win situation.
Thanks for reading and please let us know if you have any questions.
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