After a rebound, Nifty IT likely to break below 26,200 in 2023: Laurence Balanco

“The short term setup for Nifty IT is to trade back towards 31200-31300 which is roughly where the 200-day average sits in and that would coincide with the Nasdaq running back to 13,000. But that is likely where the rally is expected to stall and resume the downtrend,” says Laurence Balanco, Technical Analyst, CLSA.

What happens to the Nasdaq? It has come out of a painful period. We are seeing an in-sync move up and so is the case sporadically with Indian IT as well. Purely because of the sentimental ruboff that any crash on Nasdaq has on Indian IT, what do you foresee for not just Indian IT but global IT stocks as well?
The longer term conclusion is this is just a relief rally or bear market rally rather than the ultimate low for the Nasdaq. It is a tactical trade back to 13,000 but that is where we see the biggest upside for that tactical level. In the first half of 2023, we expect a re-break of the June and September lows that we are trying at currently. I guess there is an ongoing downtrend that I would see. The Indian IT stocks after forming pretty significant peaks in the first half of this year, again would be limited to a rebound back to those breakdown areas before the downtrend resumes.

It is a bear market really and not a sustainable up move and at least in the near term, we are not out of the woods.Where do you see crude headed? Where are we in the commodity cycle at the moment?
I think if you really take a step back and there is a chart that we have created looking at commodity prices going back over a 100 years. It is a nominal price chart that we look at and basically what we can observe on the price action is a 30-year cycle in commodities which generally breaks down into three parts of a 10-year repair process and a 10-year bull market.


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The point is the price action we have seen over the past 12 months may look extreme on a short term basis, it looks like it essentially is the kicker phase of a multiyear uptrend within the broader commodity complex. As far as Brent goes, we think we are in a higher range and consolidating in that range and the bottom end of that range is $85-88 area and the upper boundary of that range is towards $123-125 and that is the level and range that we think Brent trades into 2023.

You talked about how banking remains a pillar of strength when it comes to the Indian markets. What happens to IT because that has been quite weak so far?
The short term setup for Nifty IT is to trade back towards 31200-31300 which is roughly where the 200-day average sits in and that would coincide with the Nasdaq running back to 13,000. But that is likely where the rally is expected to stall and resume the downtrend because if you look at the longer term setup, the impressive bull run that we had from 2020 topped out in a classic head and shoulder topping formation through 2021.

We think the rebound again is part of this ongoing downtrend that the Nifty IT sector is creating which gives a short-term upside target of 31,200-31,300 but ultimately we roll over and break below 26,200 into 2023.

We are seeing the emergence of a lot of newer sectors like defence. In the year gone by, underperformers like ITC have made a very solid comeback. Outside of the IT and banks, where are you scouting for opportunities when it comes to India?
The most interesting place that has developed in the short term has been the broader pharmaceutical space – from the drug producers to the hospital names where we have seen fresh breakouts. The pharmaceutical space, having underperformed for a greater part of this year, is starting to see some leadership develop there and breakout of trading range that varies from three to 12 months. That is the space that we would look at for new opportunities.

What about China? It has been beaten down quite a bit, the Hang Seng tech index has seen quite a bit of correction this year as well. Can it be in for a very sharp rebound as things open up?
I think it is probably the biggest pain trading to year end because it is under owned and no one really wants to get involved there so we have been looking at the Hong Kong short selling turnover versus total turnover and the short selling turnover is sitting at roughly 18% this year versus 13%. This is in an environment where their total volume in the markets dropped by 26%.

Any kind of positive news can trigger quite a violent short squeeze that can see the market rally quite sharply into the year end and that could exacerbate all the underweight positions that we do have in emerging markets which will end up chasing that market higher.

The other interesting observation would be that while the Hang Seng tech index while it has been weak since June it has not made a new low below the March ’22 lows versus the Nasdaq which has made fresh lows for its downtrend of the January highs so there has been development of divergence between the Hang Seng tech index and the Nasdaq for that matter. There are some warning signs that we should not be really chasing the Hong Kong market lower at this point and there is a great risk of a sharp short covering rally into the yearend.