Technical Analysis

Dissector: Nifty IT index breaks key support

YOGANAND D | Updated on January 17, 2018 Published on July 17, 2016

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Key IT stocks were in the limelight last week and took a beating on Friday as Infosys lowered its full-year revenue guidance. The stock plummeted almost 9 per cent on that day. The BSE IT index slumped more than 5 per cent to close at 10,608.4 and the Nifty IT index tumbled almost 4 per cent to close at 10,716.4 on Friday.

The Nifty IT index futures also tumbled 4 per cent to close at 10,693 levels.

Outlook

Long-term uptrend for the Nifty IT index came to an halt in March 2015 when it registered an all-time high at 12,908. Since then, the index has been on an intermediate-term downtrend, forming lower peaks and toughs. However, it found support at around 10,200 this February and started to trend up.

Significant resistance as well as the 50 per cent fibonacci retracement level of the prior downtrend, in the band between 11,500 and 11,600, capped the rally in April. Subsequently, the index began to move sideways in the band between 10,880 and 11,600. After testing the upper boundary, the index fell 2.5 per cent on June 24, following Britain's decision to leave the EU.

This fall put pressure on the index and it failed to surpass the immediate resistance at 11,200 thereafter. Testing the resistance level of 11,200 as well as the moving average compression (21-, 50- and 200-day moving averages) at around 11,175, the index nose-dived 441 points or 4 per cent on Friday.

This fall has emphatically breached the moving average compression and the lower boundary at 10,880.

Bearish view

The daily relative strength index features in the bearish zone and the weekly RSI is on the brink of entering the bearish zone from the neutral region. Other indicators such as moving average convergence divergence and price rate of change in the daily chart also hover in the negative territory.

The short-term outlook is bearish for Nifty IT index. It can extend its downtrend and test the next support at 10,400. Decisive fall below this level will strengthen the downtrend and pull it down to 10,100 in the medium term. Significant resistances are at 10,880 and 11,200.

An emphatic break through of the key resistance zone between 11,500 and 11,600 is required to alter the intermediate-term downtrend and take the index higher to 11,800 and 12,000 levels.

Published on July 17, 2016
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