What next for CNX IT

2013 was a dream year for CNX IT as it left every other sector in the dust as it logged in gains of 58% for the year. The out-performance has to be seen in the context of the fact that the next best sector index was CNX Pharma with gains of 26.51% or less than 50% of what IT had done.

This year seemed to be no different as the Index cruised higher with gains of 4.6% and 3.8% in January and February respectively. And just when it seemed that nothing could go wrong, NRN came out with a warning. This shook the confidence of the markets and the immediate reaction was a fall in the stock price of Infy (which having more than 50% weight in CNX IT pulled that down as well).

Today, it was the turn of TCS to give out a similar warning and IT stocks once again were hard hit. The two warnings have meant that the Index itself has seen a cut of 11.4% in this month alone. Now, while 11.4% fall in a Index is not definitely something good, the overall chart suggests that even after this fall, we are no closer to being in risk of the rally petering out.

Remember, CNX IT broke out at from 7600 levels and even after its current rout, the stock is still 20% from the breakout point. The previous biggest monthly fall in CNX IT was in April of last year after which the markets rebounded to new highs. This in a way gives us hope that all in not lost.

Since we do not have any past high’s to seek support, for the chart, I am using a mix of Fibonacci and Moving Averages to guage the levels where we may seek some support if the broader trend is to remain bullish. Technically speaking, if CNX IT drops below 8320, we will enter a bear market though for me, bear market will be seen only on a break of 5900 which speaking is pretty far away to even consider for now.

The first major support level would be around the 8750 levels. This is the 38.2% fibonacci retracement of the current rally as well as the 200 day EMA of the Index. If this breaks, the next major level comes only at 7625 which is the 61.8% retracement level as well as the breakout zone and something that should hold fort for now.

If one looks at the chart of the major IT companies, Infosys looks weaker compared to the rest since the breakout it saw a few days back is now as good as failed. Today’s close is at the 200 day EMA, break of which can result in Infy testing the 3000 levels before the results of the company are out.

HCL Tech on the other hand is still extremely strong and can be bought on test of major supports. TCS is also pretty near to its 200 day EMA though the weekly charts shows it in much better hands than Infy. Even Wipro seems better placed compared to TCS and Infy for now though this could change if sentiments go from bad to worse.

Another stock that may be worth pursuing during this weakness would be Tech Mahindra which has seen a tremendously good year in 2013 and any set-back to it would still mean its a buying opportunity than one to sell and exit.

Overall, I would say that CNX IT still has some way to go down before we can start considering a bounce. With Infosys being the first IT company to declare its results in April, that may be the period of either a bottoming out getting formed or the start of a new bear run.