'Bet on TechM, Wipro and Mindtree for better return among IT stocks'

Arpan Shah

After many weeks of consolidation, IT index has finally given a breakout from Cup & Handle technical formation. Cup & Handle breakout is considered as a bullish momentum continuation pattern. Upside targets of this breakout are 17,500-18,500-20,500 in coming months. IT index has tradable future and traders can take advantage of that instrument.

IT stocks tend to perform better when there is increased volatility in the market as they are considered as a safe haven in volatile times. On May 23, the Lok Sabha election result is scheduled and this will lead to increased volatility for next one month. This is one of the reasons for bullishness in IT stocks.

Historically, IT index has given a superior return in six months after the election outcome. As evident in the graph below, the IT index has given 43.8 percent, 91.3 percent and 29 percent returns in 2004, 2009 and 2014, respectively. Returns are calculated from May 1 to November 30 in the respective years.

Another factor that will support the IT stocks is the dollar strength. As shown below in the image, USDINR is bouncing back from the cluster of the support area. 68.30 is the zone traders should watch out for. If the currency does not violate this area then we can expect a sharp pullback in USDINR. on the other hand, 70.3 is the breakout level and once it crosses this level, we can expect it to reach 72-74 zone in the coming weeks. If that were to happen then it will be a big supporting factor for the IT stocks.

Both these factors will help IT stocks outperform in coming months but which stock will lead the rally is the money-making question. Both TCS and Infosys hold 27 percent each in the index weight and they are likely to take leadership alternatively to help index inch up.

Though we believe both stocks are poised for the upside, there are other stocks from the IT sector that can give better returns. Tech Mahindra, Wipro and Mindtree are our three top picks from the sector.

Tech Mahindra: Buy | Target: Rs 1,030 | Stop loss: Rs 730 | Upside: 25 percent

After breaking out from consolidation phase stock has rallied from Rs 725 to Rs 840. After this upside, the stock has corrected to retrace 50 percent of the rally. Now again stock has resumed the upside rally and heading towards Rs 925-1,030 in coming weeks. Investors should accumulate between Rs 800-830 and keep a stop loss of Rs 750.

Wipro: Buy | Target: Rs 350 | Stop loss: Rs 250 | Upside: 18 percent

After the throwback towards the breakout level, which was also a retracement support area, the stock has rallied sharply and is heading towards new highs. Investors should accumulate between Rs 285-300 and expect upside till Rs 325-350 while Rs 250 should be kept as a stop loss.

Mindtree: Buy | Target Rs 1200 | Stop loss: Rs 940 | Upside: 20 percent

The stock is in accumulation phase for last many weeks and it is on the verge of the breakout from the resistance level. Rs 1,000 is the polarity level and has acted as strong resistance in the past. Once the stock closes above Rs 1,000, it is a strong buy.

Traders can buy above Rs 1,000 and expect upside till Rs 1,100-1,200. Once it breaks out from this level, Rs 940 should be kept as a stop loss.

The author is technical analyst at Monarch Networth Capital.

Disclosure: He does not have any direct or indirect financial interest nor any other material conflict of interest at the time of stock recommendation in the subject company. Analyst does not have actual/beneficial ownership of one percent or more in securities of the subject company.