The Top/Down approach to markets is at the core of what we do at All Star Charts. That means starting at the asset class level and peeling back each layer to refine our view of the smaller components that make up that asset class. With each new layer, we discover information that helps us form our weight of the evidence conclusion.
That brings us to our weekly column, The Top/Down Take, where we hope to educate readers on how we execute this process and highlight its value through the analysis of popular stocks.
Last time it was Vodafone Idea Cellular, but today the stock we’re looking at is Tata Consultancy (TCS) which made new all-time highs this week.
First, let’s start at the asset class level with the Nifty 500 which is the broadest measure of India’s stock market we have. Prices have recovered well off their March lows and have approached long-term resistance near 9,900. Additionally, the 200-day moving average is flat, showing that the long-term trend is sideways and suggesting that a breakout to new all-time highs is unlikely on the first attempt.
Click on chart to enlarge view.
Now let’s take a look at the sector using the Nifty IT Index. We highlighted this breakout to new all-time highs in July and have been erring on the long side of the sector since. This week it went out at new highs, so as long as prices are above 16,400, then the bias remains higher towards 23,300.
And on a relative basis, the Nifty IT/Nifty 100 ratio has broken out of its long-term base and is on its way to new all-time highs.
The strength in the IT sector on an absolute and relative basis continues to suggest this is an area we want to be aggressively buying.
Now, let’s move into Tata Consultancy, which is the sector’s second-largest component at ~23% of the Nifty IT Index. The chart looks very similar and made new all-time weekly closing highs this week.
This is a decisive breakout above 2,300 that has a measured move target near 3,300. And 1,000 points of upside could just be the start as our longer-term upside target is near 4,445 as long as as we continue to see weekly closing prices above 2,300.
From a more tactical perspective, this breakout looks intact as long as prices are above their recent pivot low near 2,225 and our first upside target is near 2,790.
Regardless of the timeframe you’re referring to, this week’s action has confirmed a successful breakout in the stock.
And on a relative basis, TCS looks ready to outperform the Nifty IT sector once again. Prices pulled back towards support/resistance that’s been intact since 2013 and are stabilizing as momentum diverges positively. As long as this ratio is above 0.121, then we can look for TCS to outperform the sector going forward.
And relative to the Nifty 50 large-cap index, prices have stabilized and look ready to push to new highs. As long as prices are above 0.188, then the bias is higher and we can expect outperformance from TCS.
When we talk about secular leaders like Reliance they all have similar conditions in common. They’re exhibiting a strong absolute trend, positive momentum characteristics, and relative strength versus their market/sector/market-cap segment.
TCS now checks all of these boxes. Prices recently broke out of a 2.5-year base to new all-time highs, momentum is firmly overbought, and it’s exhibiting relative strength across all of its relevant peer groups.
It’s in a strong asset class (stocks), a strong sector (IT), and is re-emerging as a leader within that sector and its market-cap segment (large-caps).
And from a sector perspective, our patience towards IT earlier in the year paid off. In late June we outlined the lack of participation from Infosys and TCS, but in July we finally got the initial absolute and relative breakout in Nifty IT and have been benefiting from that continued strength.
As for TCS, we’ve been waiting for our “fat pitch” since July and this week we got it. Now, we want to be swinging aggressively on the long side.
We’ll be discussing all of the current opportunities in the IT sector, as well as the other market themes we’re taking advantage of in this Tuesday’s Members-Only Conference Call. We hope to see you there!
Thanks for reading and please let us know if you have any questions!