IT bounce breaks 5-day losing run, but analysts warn relief may be short-lived

Mumbai: Investors in India's battered information technology sector found a brief respite on Wednesday as software services stocks rebounded, snapping a five-session losing streak. However, analysts cautioned that the relief may be fleeting; most derivative wagers remain bearish following the IT index's 22% plunge during the February series.

The Nifty IT index closed 1.6% higher at 30,526.35 on Wednesday, giving up a portion of the 3.1% gains notched up early in the day. The Nifty gained 0.2%, or 57.85 points, to close at 25,482.5 after rising as much as 0.9%. The IT stock benchmark had dropped 9% over the previous five sessions against the 1.2% decline in Nifty.

The sector has been under sustained pressure throughout February. Concerns intensified following the launch of new tools by San Francisco-based AI firm Anthropic, which triggered a sell-off fuelled by anxieties over future revenue and order wins. Following the expiry of Nifty's February futures and options contracts on Tuesday, the oversold IT pack gained ground on Wednesday, led by short covering.

Agencies

FIRST DAY OF NEW SERIES Oversold information technology pack rings in some gains, led by short covering l Analysts warn sentiment’s still bearish with short positions intact

Cautious Signals

Sudeep Shah, head of Technical and Derivative Research at SBI Securities, said the index continues to exhibit underlying weakness despite the near-term bounce.

"While the sharp dip in RSI (Relative Strength Index) below 20 triggered some technical rebound on Wednesday, the broader trend remains cautious with short positions largely intact, as seen in rollover of over 90% positions from February to March," he said. "The initial strength, which is usually seen on the first day of the new series, may not sustain, as the bounce appears driven more by short covering than fresh long build-up."

At the end of every monthly derivatives contract, traders must choose to either exit their positions or "rollover" and carry their bets into the following month.

"We observed a significant build-up of short positions in the February series across the IT sector, with no meaningful recovery. Open interest increased in both midcap and large-cap IT stocks, most of which were rolled over into the March series," said Amit Trivedi, SVP of Institutional Equities Research at Yes Securities.

Trivedi said the rollover in IT stock futures reached 90%, with open interest surging 32% during the February series. On a stock-specific basis, rollovers ranged from 81% to 95%, with current-expiry open interest exceeding the previous series. "And combined with price declines, this indicates a carry-forward of short positions," he said.

According to a Yes Securities report, the highest rollover rates into the March series were seen in Coforge (94.7%), Tata Technologies (94.6%), Oracle Financial Services Software (94.3%) and Tata Elxsi (92.7%).

Vipin Kumar, AVP of Derivatives and Technical Research at Globe Capital Market warned that any climb toward the 31,500-32,000 range would likely attract a fresh round of selling pressure, potentially dragging the index down to 28,500 in the near term. The IT index closed at 30,526.35 on Wednesday.

Trivedi also expects the sector to remain constrained. "At the index level, following the sharp correction, the index is likely to consolidate or trade range-bound, with immediate resistance at 32,800 and support around 29,300," he said.

Among specific stocks, Trivedi said TCS, Infosys, Coforge, and Persistent Systems currently exhibit weaker technical structures compared to HCL Technologies and Wipro.