The IT pack has been giving signs of a reversal from the last few sessions. After falling considerably this year, investors’ confidence in this beaten-down space seems to be coming back. While I have covered many IT stocks in the last couple of days, another one is looking extremely good on the daily chart and that is Birlasoft Ltd (NS:).
The company provides digital IT services in many parts of the world including Europe, the United States, the United Kingdom, etc. The company’s offerings include data analytics, connected products, intelligent automation, cloud, blockchain services, etc.
The share price of Birlasoft has seen a noticeable plunge from the high of the year, as all IT counters witnessed a selling spree, primarily on account of rising interest rates. However, after a seemingly abating supply near the bottom, the stock is gearing up to stage a successful comeback. Why this reversal has a higher probability? Well, there are a few key reasons.
Image Description: Daily chart of Birlasoft with the RSI at the bottom
Image Source: Investing.com
The major reason is the reviving sectoral strength in the IT space. Almost all counters are making a comeback and sector-wide buying helps even the worst of the laggards to make a move as sentiments turn positive.
The second reason is the formation of a bullish divergence around the bottom. Divergence is one of the most prominent signals for a trend reversal as it depicts a reduction in the current momentum and a potential reversal to the opposite one. As can be seen from the chart above, when the stock made a lower low on 29 August 2022, the corresponding RSI (daily, 14) failed to follow the price action and made a higher low. This divergence is generally an early indication of a trend reversal of the price.
The third reason is the gradual transitioning of the trend change. I have mentioned many times that the more time a stock takes to change its trend, the higher the probability of the sustainability of the new trend. This is because a gradual change gives all the market participants enough time to decide on the newer price levels, hence it increases the quality of the impending move. Comparing it with a very sharp and abrupt trend reversal, it has a higher probability to fade as many market participants might decide to back out on their decision.
The fourth reason is the trendline breakout, which kind of confirms the trend reversal. The share price of Birlasoft rallied 3.12% to INR 339, by 11:07 AM IST, surging past its 3.5-month-long falling trendline. This was the final call for the bulls to start taking the charge, and for the bears to start stepping back.
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