Why IT Stocks Are Falling: A Technical View

The Nifty IT index has fallen since the start of 2022. The index is down over 30% from its high of 39,446.

Today, IT stocks are the top losers with the IT index falling over 2% in early trade.

The bounces in IT stocks have been short as sellers have consistently emerged at higher levels.

The recent decline in the Nifty IT index suggests a potential bull trap scenario on the chart.

Technical View

Here's the current situation of IT stocks from a technical perspective.

Nifty IT Index, Daily Chart

 

IT stocks have experienced a significant decline today marked by various technical indicators - a trendline breakdown, a dumpling top candlestick pattern, and the index falling below the 50DEMA and the 200DEMA death cross.

A trendline breakdown refers to a situation where the price of a stock falls below an established upward trendline. This indicates a potential reversal in the stock.

This breakdown often leads to increased selling pressure as well as a decline in stock prices.

In the chart above, multiple trendlines broke down at 28,800 and 29,000. This suggests a loss of bullish momentum as well as weakening demand for IT stocks.

A dumpling top candlestick pattern is a bearish reversal pattern. It occurs when a stock exhibits a series of narrow-range candles on the chart followed by a wide-ranging bearish candle.

This pattern suggests a shift in market sentiment from bullish to bearish. It often precedes a decline in stock prices.

The presence of the dumpling top candlestick pattern in the Nifty IT index indicates a potential reversal in investor sentiment and a subsequent decrease in demand for IT stocks.

The death cross of the 50-day exponential moving average (50 DEMA) and the 200 DEMA) is a widely followed technical indicator. Moving averages are used to assess the long-term and short-term trends of a stock or index.

When the index falls below both the 50 DEMA and 200 DEMA, it forms a death cross. In technical analysis, this is a bearish signal.

This crossover suggests a significant negative shift in investor sentiment. It can result in further selling, contributing to the decline in IT stocks.

In fact, the inability of the index to maintain at a level above the 200 DEMA (29,135) signifies a favorable situation for the bears.

There are other factors contributing to the falling IT stocks in addition to the technical indicators - weak sentiment around IT stocks, underperformance against the Nifty50, and hedging against the longs as IT stocks are at the bottom of the performance table.

Conclusion

Given the presence of bearish chart patterns, the critical support zone around 26,000 becomes a crucial make-or-break level for the bulls.

It's essential for investors to carefully analyse these factors and monitor the market conditions before considering making any investments in the IT sector.

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