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Head & shoulder pattern on Nifty IT index chart worries CLSA India

MUMBAI: The Nifty IT index’s mouth-watering returns over the past 14 months are under a threat of a major reversal, as brokerage firm CLSA India pointed to a worrying pattern development in the index’s daily chart.

The Nifty IT index has formed a Head and Shoulder pattern on the daily chart, according to the brokerage firm. The pattern is one of the most trustworthy ones for technical analysts when it comes to predicting a bullish-to-bearish trend reversal in a security.

The pattern is described as a series of top formations in a chart where in the outside two tops are at the same level whereas the middle top is at a higher level.

According to Investopedia, the Head and Shoulder pattern is believed to be one of the most reliable trend reversal patterns. It is one of several top patterns that signal, with varying degrees of accuracy, that an upward trend is nearing an end.

“We continue to flag the NSE IT sector as the most worrisome set-up, as price action has traced out a three-month topping pattern (Head and Shoulders),” CLSA India said in a note.

The information technology sector has been one of the biggest beneficiaries of the post-Covid bull market as accelerated digital transformations at global companies led to an influx of billions of dollars of new deals for the sector.

The Nifty IT index has risen over 200 per cent since April 2020 led by spectacular gains in constituents like Infosys, Wipro, Tata Consultancy Services and others.

CLSA India says if the index falls below its 50-day moving average, which is close to the current month’s low at 34,372-34,719, it would confirm the cited top. “…and provided a downside target of 31,700-31,800 with next major chart support back at the 200-day MA at the 28,667 area,” CLSA India said.

Ruchit Jain, senior analyst of technical and derivatives at Angel Broking, digressed from CLSA’s view and said unless the Nifty IT index falls below its 20-day exponential moving average, any negative bias is unlikely to sustain.

“We would recommend to not take any contra trade in the IT index till it breaks below 20-EMA,” Jain said. He said the trend in the IT sector still remains positive as it is forming higher highs & lows on the chart.

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