One Sector, Two Stocks to Outperform Nifty50

Author: Brijesh Bhatia (Twitter: @bbrijesh9)

Pune, 23 November 2024: In recent months, the Indian stock market has faced a noticeable downturn, with the benchmark Nifty50 index witnessing a fall of little over 10% from its highs. This extended period of weakness has dampened investor sentiment, leading to caution across most sectors. However, amidst this bearish trend, the market presented a glimmer of hope on Friday. This unexpected surge on Friday helped the Nifty50 index close with a weekly gain of 1.59%.

While the market’s decline has been disheartening for many, there are emerging signals that the bulls might be ready to regain control. The Nifty50 and the broader Nifty500 indices show early signs of reversal near the critical 200-day exponential moving average (200-DEMA).

In this week’s market outlook, we will focus on the Nifty IT Index, which has recently broken out of a bullish pattern and shows potential for outperformance. Additionally, we will highlight two stocks within the IT sector that may have the potential to outperform both the IT index and the Nifty50 index in the coming weeks.

Nifty IT Index and Nifty50 Ratio Chart
The NiftyIT/Nifty50 ratio chart is a valuable tool for gauging the relative strength of the IT sector compared to the broader market. A rising ratio implies that the Nifty IT Index outperforms the Nifty50, while a declining ratio suggests the opposite. The ratio is plotted on a point-and-figure (P&F) chart designed to highlight price movements and trends without the distraction of time.

Source: TradePoint, Definedge Securities

The NiftyIT/Nifty50 ratio broke out from a significant multi-year resistance zone, signalling a shift in momentum. After the breakout, the ratio was retested, and the rally resumed upward, suggesting that the IT sector may continue to outperform the broader Nifty50 index in the coming months.
The breakout from the bullish pattern known as the “Anchor Column Follow Through” (AFT) further reinforces this view, indicating a resumption of the Nifty IT Index’s strength over the Nifty50.

Nifty IT Index Daily Chart

Source: TradePoint, Definedge Securities

Turning to the daily candlestick chart of the Nifty IT Index, several technical patterns point toward further bullish potential.
⦁ Trendline Breakout: The index recently broke out from the trendline resistance formed by the September highs. This is a significant development, as trendline breakouts often signal the continuation of an existing trend—in this case, the resumption of the bullish trend in the Nifty IT Index.

⦁ Bullish or Inverted Head & Shoulders: On the chart, we can also see a Bullish Head & Shoulders pattern that formed at the top of the price action. This pattern is known for its predictive nature, indicating a trend reversal from bearish to bullish. Completing this pattern further strengthens the argument for continuing the bullish trend in the Nifty IT Index.

Given these technical developments, the Nifty IT Index appears poised to lead the Nifty50 higher, potentially offering a path for the broader market to recover from its recent decline.

Stocks to Watch: Coforge and HCL Technologies
Now, let’s turn our attention to two stocks within the IT sector that are showing strong technical setups and have the potential to outperform both the Nifty IT Index and the broader Nifty50.

⦁ Coforge
Coforge is a leading provider of digital services and consulting, offering solutions in areas such as cloud computing, automation, and cybersecurity. The company has garnered a strong reputation for its ability to deliver high-quality IT services to clients across various industries, positioning itself as a prominent player in the Indian IT space.

Source: TradePoint, Definedge Securities

On the Point & Figure chart, Coforge displays a bullish technical setup. The formation of a cup-and-handle pattern indicates a strong potential for price appreciation, as this pattern is often a precursor to continued upward momentum. After forming this pattern, the stock witnessed a series of double-top breakouts (DTBs), further confirming that the bulls are in control of the trend.

With a solid relative performance compared to its peers and a positive technical structure, Coforge is a stock worth considering for readers looking to capitalise on the potential upside in the IT sector.

⦁ HCL Technologies
HCL Technologies is one of India’s largest and most successful IT services companies. Its diverse offerings include IT infrastructure services, enterprise solutions, and digital transformation services. The company has a robust track record of growth and a solid presence in both the domestic and global markets.

Source: TradePoint, Definedge Securities

HCL Tech has recently demonstrated significant bullish activity on the Point & Figure chart. The stock faced resistance around the Rs. 1,875 level but finally managed to close above this resistance zone, signalling a breakout. This resistance had acted as a cap on the stock’s price for several months, and breaking above indicates that the stock entered a new phase on the chart.

Moreover, the Bullish Quadruple Breakout on the P&F chart suggests that the stock is well-positioned to continue its upward trajectory after a period of consolidation. With this technical setup, HCL Technologies looks primed to outperform, making it a strong contender for any investor’s watchlist.

The Road Ahead for the Nifty50 and IT Sector
While the Indian stock market has been navigating a challenging period, the signs of a potential reversal are becoming more apparent. The Nifty50 and Nifty500 indices show bullish signals at the 200DEMA, suggesting that the bulls may soon return.

Within this context, the Nifty IT Index stands out as a key sector poised to outperform the broader market. The breakout from the bullish pattern on the Nifty IT/Nifty50 ratio chart, along with strong technical signals on the Nifty IT daily chart, supports the view that the IT sector will continue to lead the market higher.

Coforge and HCL Technologies stand out among the IT stocks due to their bullish chart patterns and strong technical setups. Both stocks have the potential to outperform the Nifty IT Index and the broader Nifty50, making them valuable additions to any investor’s portfolio in the coming weeks.

Disclaimer: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. This article is strictly for educative purposes only.

As per SEBI guidelines, the writer and his dependents may or may not hold the stocks/commodities/cryptos/any other assets discussed here. However, clients of Definedge may or may not own these securities.

About Writer:
Name: Brijesh Bhatia
Bio: Brijesh Bhatia has over 18 years of experience as a trader and technical analyst in India’s financial markets. He is a well-known face in the business channel as a Market Expert and has worked with broking giants like UTI, Asit C Mehta, and Edelweiss Securities. He is currently a Senior Research Analyst and Editor at Definedge.