Is the Indian IT sector beginning a fresh uptrend?

If so, which are the leaders? Should we look at post Covid bull run leaders; or are new leaders emerging this time around?

Feb 18, 2023

Why am I suddenly talking about the IT sector today?

Simply because some of the IT names are showing relative strength and the sector index is showing a reversal on the charts.

In this article, I will share my thoughts on how I am planning to play this sector going forward.

Let’s first talk about the Nifty IT index:

From the chart above you can see the following things:

Downtrend since the Head & shoulder reversal formed in January 2022.
7-month-long Stage-1 rectangular base formation.
A failed breakout attempt out of the base on the last week of November 2022.
Earliest signs of a trend change from the higher swing low it put at the midline of the flat channel.
A new higher high above the last higher high as the week closes.
Relative strength outperformance begins; post the higher low point as shown by the RS line crossing 0.

Given the above price action; as trend followers, it is, therefore, a good idea to prepare ourselves for the possibility of this nascent uptrend taking shape and turning into a full-blown trend.

I am personally anticipating another round of price contraction with the rising trendline as support (see the dotted anticipation on the charts). This may or may not occur, and we might see a violent breakout next week.

We should also keep the option of another failed breakout open, just like the one last November.

What’s my plan in case a breakout materializes?

I plan to play it via both the IT index and specific stocks. ( Maintain caution that this is my personal opinion and I do not claim that this is the right and only way to do it).

Why Index?

Because I don’t want to miss the IT run in case my stock picks turn out to be duds.

Which are my top stock picks?

Again maintain caution that this is not a piece of investment advice and I may or may not be invested in these stocks in the future.

Now there are 2 ways to look at individual stocks:

Stocks that are showing reversals with HH-HL structures just like the IT index, or
Stocks that are already making fresh 52-week/all-time highs.

There are great names fundamentally in both categories but I am more inclined toward the second category. Why?

Stocks at ATH/52-week highs do not have something called “overhead supply”. Meaning, they do not have prospective sellers waiting for the price to come at their buy price ready to offload the shares and get out at breakeven,
The broken leader syndrome: It has been observed that the stocks which have led a big bull run do not lead the immediate next rally. As most post covid leaders are putting a reversal base or trying to break out just like the index, chances are that these may not be the leaders if a rally is indeed on the cards.

So, keeping the above points in mind, here are some of my top picks to lead the IT run. Notice that most of them will be making new highs or hovering around one:

Cignititec: Broken out of a Flatbase and an inverse Head & Shoulders.
Saksoft: At the neckline of an inverse Head & Shoulders.
Axiscades: Bullish on Bullish breakout and flagging around the ATH.
RateGain: IPO name with a trend change.
Datamatics: Flatbase with an iH&S-like reversal with clear VCP characteristics.
Sonata Software: Cup-like base nearing the ATH pivot.
Persistent systems: Cup-like base at ATH. Anticipating another contraction here.
Kpit technologies: Cup and Handle breakout.

the last 2 names were also a part of the previous bull run and looks like an exception to the broken leader syndrome. One reason apart from excellent fundamentals could be that these are relatively new companies.