The diverse trend seen among large and midcaps suggests the depth in the market is missing, and the rally might not have enough legs, suggest experts
Even though Sensex is trading near its all-time highs, 285 BSE500 stocks are trading below their long-term moving average (200-DMA) in June.
The diverse trend seen among large and midcaps suggests the depth in the market is missing, and the rally might not have enough legs, suggest experts.
“A handful of the stocks managed to pull the value of the benchmark indices to new highs and the majority of the investor portfolios bled,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in told Moneycontrol.
“Shockingly, we have found 1,329 out of 1,849 stocks are trading below 200-day moving average whereas 1,096 out of 1,849 have either slipped or are trading below the equivalent level of Nifty October 2018 lows of 10,000,” he said.
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 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.
Table: Top 20 of the 285 stocks that are trading below 200-DMA as of June 25. This table is for reference only and not necessarily buy or sell ideas.
The general rule is if a stock is trading above its 50-DMA and 200-DMA, the trend is largely upward, although there could be an intermediate downtrend as well.
“Technically, it indicates bearish outlook for stocks trading below 200-DMA and investors must be cautious to enter in stocks trading below 200 DMA,” Romesh Tiwari, Head of Research, CapitalAim told Moneycontrol.
Does it mean stocks that are trading below 200-DMA are weak and investors should exit?
The decision to buy or sell a stock should be based on a complete study of the stock and sector under consideration. There are plenty of names that are trading below 200-DMA due to external factors but are still good long term bets, suggest experts.
“Stocks like Maruti, ITC, Tata Steel, and Tech Mahindra are fundamentally sound companies and can be bought for long term investment in declines,” said Tiwari.
But, there are also stocks that are displaying strength. 215 BSE500 stocks are trading above their 200-DMA in June. They include TCS, RIL, HDFC Bank, Infosys, SBI, ONGC, L&T, Bharti Airtel and Axis Bank, among others.
Stocks trading above 200-DMA are considered to be in an uptrend and can be bought on declines by short term traders if other supporting indicators are present.
In a market where the majority of stocks are trading below 200-DMA, it shows the robustness of stocks and these levels must act as good support for the future, suggest experts.
“Investors should avoid using just one single indicator to make buy or sell decision. Investors should not only track moving averages but also the time spent by a stock under or above crucial moving averages to analyse the maturity of the trend and plan their entry and exit in the stock,” said Tiwari.
Investors should use other parameters such as RSI, Stotachtics as well as other trend indicators to confirm the trend. If you are planning to go long in the stock, the above list could help you in filtering your stocks.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.