In technical trading, moving averages such as the 50-DMA, 200-DMA act as both support and resistance levels for the stock
Thanks to the relentless selling in last 4 weeks, more than 70 percent of the top 500 companies listed on Indian bourses are trading below 200-day moving average. Nifty already broke below the long-term average on August 31.
Stocks that are trading below this crucial long term average include MRF, Page Industries, 3M India, Eicher Motors, Maruti Suzuki, Hero MotoCorp, Bajaj Auto, Pfizer, Dr Reddy’s Laboratories, HEG, among others.
Let’s understand why 200-DMA is important. Theory suggests that the 50-day moving average and 200-DMA can help traders filter stocks that are showing signs of strength or weakness amid market volatility.
If a stock's price remains above the 200-DMA on the daily chart, the stock is generally considered to be in an overall uptrend and vice versa.
In technical trading, moving averages such as the 50-DMA, 200-DMA act as both support and resistance levels for the stock.
The general rule is if a stock is trading above its 50-DMA and 200-DMA, the trend is largely upward, and if it is trading below 200-DMA, it is in a downtrend.
Table: Top 20 of the 367 BSE500 stocks that are trading below 200-DMA as of August 1. This table is for reference only and not necessarily buy or sell ideas.
Although 200-DMA should not be used in isolation to filter stocks for investment. Investors should also consider the fundamentals of the company and the reason why a stock fell below its long term average.
“200-DMA is not the sole indicator to decide on the trends for investments. There could be a lot of whipsaws while tracking 200-DMA,” Vinay Rajani, Senior Technical & Derivatives Analyst, HDFC Securities told Moneycontrol.
“Investors are advised to accumulate quality stocks on declines. Out of the mentioned list, our rating on Dr Reddy’s, Lupin and Bajaj Auto is to accumulate,” he said.
Most of the stocks in the list are from the mid & Smallcap space and some of the prominent largecaps are also part of the list. Investors can look at companies especially largecaps that have fallen in double digits from their recent highs, suggest experts.
“The indices fell beyond expectations and was triggered by the tax on FPIs. The market would be under pressure until further clarity on this. As per current fundamentals and earnings, Nifty can arrest between 10,800-10,700,” Ashish Nanda, EVP & Business Head - PCG, Commodities and Currency Business, Kotak securities told Moneycontrol.
“For fresh investors, this presents an opportunity to invest in large-cap companies with a long term view as they are 10-20 percent off their recent highs,” he said.
What should investors do?
“Stocks that are trading above 200-DMA are already outperformers and they will continue to be part of long term portfolio,” Mustafa Nadeem, CEO, Epic Research told Moneycontrol.
“Not all but few of the stocks that are trading below 200-DMA are worth to have in your portfolio. Pharma space has been in a bearish trend and is underperforming for long. There is a cyclical nature in auto stocks and there may be rebound in them,” he said.
Nadeem further added that stocks like Maruti, Bajaj, Reliance, Britannia have been wealth creator and they will continue to be in the long term. So these are leaders in their space and are available at a good price.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.