Sector View. Nifty IT index in a medium-term downtrend

In line with the broader benchmark indices, the Nifty IT index also witnessed sharp fall amid volatility last week. The Nifty IT index tumbled almost 5 per cent, decisively breaking through a key support in the band between 10,000 and 10,100 to close at 9,434.6 levels.

This fall was mainly triggered by sharp slump in the stocks of TCS (9.8 per cent) and Infosys (5 per cent) which have higher weightage in the index. Both the stocks have breached their key medium-term support levels and this has strengthened the downtrend.

Following a strong rally in 2013 and 2014, the Nifty IT index extended its long-term uptrend until March 2015, when it marked an all-time high at 12,908. The index encountered resistance at this level and subsequently reversed direction.

Since then, it has been on an intermediate-term downtrend, charting lower peaks and toughs. During mid-August, the Nifty IT index conclusively declined below the moving average compression (21-, 50- and 200-day moving averages) at around 11,080.

The downtrend got intensified in early September as the index breached its significant long-term support at 10,400 levels.

Thereafter the index moved sideways for more than one month before resuming its downtrend. It trades well below its 50 and 200-day moving averages.

Medium as well as short-term trend are also down. Last week’s 5 per cent plunge has decisively broken a key support in the band between 10,000 and 10,100, which has now turned into a vital resistance zone.

The index has a significant long-term support at 9,000, which also coincides with 50 per cent fibonacci retracement level of the prior uptrend.

In the coming weeks, the index can test this support and there is possibility of it reversing higher from this base level.

In such a scenario, the index can trend higher to test the key resistance band between 10,000 and 10,100. Only a strong rally beyond the resistance level of 11,200 will alter the intermediate-term downtrend and take the index northwards to 11,600.

Key resistances before 11,200 are placed at 10,400 and 10,800 levels. On the downside, a strong fall below 9,000 level will mar the long-term uptrend and can pull the index down to 8,800 and 8,400 levels.

The index is in a short-term downtrend. However, it tests a key support at 9,400 levels. With the daily relative strength index hovering in the oversold territory a corrective up move cannot be ruled out.

An upward reversal for the current support can take the index higher to 9,600 and 9,800 levels in the near term. To alter the short-term downtrend, the index needs to decisively move beyond 9,900 levels.

Such a breakthrough can push the index higher to 10,000 and 10,200 levels in the short term. But a slump below 9,400 can extend the downtrend and pull the index down to 9200 and then to 9,000 levels.

Gaining despite volatility

Last week, Bank Nifty gained 3.6 per cent amid volatility. Though the index revisited the 20,000-mark on Thursday, triggered by a strong rally in public sector banks, it retreated 2.3 per cent on Friday ending the week below the 20,000-mark. This appears to be a false break-out.

Since late February low of 13,407, the Bank Nifty has been on an intermediate-term uptrend, forming higher trough and peaks. Within this uptrend, the index has been in a sideways consolidation phase in the band between 19,000 and 20,000 since early September.

The 20,000-mark is a significant resistance for the index which it continues to test.

Only a strong break-out of this level will reinforce the bullish momentum and take the index northwards to 20,500 and then to 21,000 in the medium term.

The index trades well above its 21 and 50-day moving averages. The indicators in the daily and weekly chart are trending upwards, showing signs of bullishness. However, inability to rally beyond 20,000 will keep the index consolidating within the aforementioned sideways band.

On the downside, an emphatic plunge below the key base level at 19,000 will bring back selling pressure and drag the index down to 18,800 and then to the 18,500-18,600 range in the short term. Key support below 18,500 is at 18,000.

Traders with a short-term perspective should tread with caution and remain on sidelines until the volatility settles. Immediate support is at 19,500. A slump below this level and can pull the index down to 19,000 which is the lower boundary.

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