Technical experts believe the Nifty 50 is well on course to make a new high, as the benchmark index is trading well above its 200-day daily moving average (200-DMA) level, a key barometer to ascertain the near-term outlook.
An index trading above its 200-DMA is often seen as a ‘buy zone’ or a sign of near-term bullish outlook, as per empirical data, which shows indices typically scale higher grounds after crossing this crucial technical marker.
Incidentally, while the Nifty 50 has been trading above 200-DMA for a few days, this is the first time since January that the index crossed and stayed consistently above the mark.
Akshay Chinchalkar, Head of Technical and Fundamental Research at Axis Securities, while explaining the relevance of the level, remains bullish in the near term due to the behavioural dynamics it triggers, as well as the empirical evidence.
“If a market is trading above the 200-DMA, it is a ‘buy on dips’ market. If it is trading below, then it is a ‘sell on rallies’ market. That’s the first layer of decision-making,” he said.
Chinchalkar believes that the Nifty 50 is on its course to make a new high before the end of the current calendar year. “… globally, the big money really looks at whether a market is above or below that 200-day average,” he said, while highlighting that the 200-DMA is pegged at around 24,050 and the index managed to stay above that level even amidst heightened volatility seen in the recent past.
“In the markets, round numbers have a special significance. Market often reacts at round numbers. Options were also suggesting that 24,000 is a very, very key level to watch,” he said.
The chartist further added that during the last 20 years, there have seen 20 such instances where an upside breach of 200-DMA was followed by a close above it.
“Nifty's close under the 200-DMA was immediately followed by a close above it. Historically speaking, that has been bullish. Backtested data over a 20-year period shows that the signal has had a 75% win rate 5 days forward, with an average return of over a percent. So, three out of four times, if I had simply bought the Nifty on this signal, I would have made money,” said Chinchalkar.
Interestingly, data further shows that the win rate goes up to 84 percent if one looks at the data for 20 days after the index crosses its 200-DMA level. “… the win rate goes up from 75% to 84% and the average return goes up five times,” Chinchalkar said.
In a similar context, Amol Athawale, Technical Analyst at Kotak Securities said the market is forming higher highs and higher lows, while adding that the uptrend wave is likely to continue in the near future.
“We believe that the medium-term market outlook remains positive. Temporary overbought conditions could see range-bound activity in the near future but on the downside, 24,400 and the 20-day SMA, or 24,230, would act as key support zones,” he says while adding that 24,800 and 25,000 could serve as key resistance areas for traders though a successful breakout above 25,000 could push the market toward 25,500.
“Further upside potential may continue, which could lift the index up to 25,750” said Athawale.
“Currently, all the moving averages and momentum-based indicators are suggesting further bullish momentum. Apart from this, Nifty PSU Bank, Financial Services, Metal, Automobile, and Capital Market space is likely to outperform in the short term,” said Sudeep Shah, Deputy VP and Head of Technical and Derivative Research at SBI Securities.
Jaykrishna Gandhi, Head, Institutional Equities, Emkay Global Financial Services said he sees the current run sustaining, and taking Nifty to 24,800-25,000 level. These levels would see book out of gains in short term. However long term, 26,000-level looks much achievable.
"The run up in the market so far is driven by the liquidity and boost to the interest rate cut expectations, but overall earnings have only come off," he expects the expects the downgrades to be over by the end of this quarter
Amongst the sectors, he finds financials a preferred space. Small and midcap private banks too are seeing interest, to play easy liquidity and the MFI turnaround. Lowered probability of a US recession is also favourable for technology, with already reasonable valuations.
"However, broad-based recovery is still to be seen, as major concurrent indicators like loan growth, passenger vehicle sales, and credit card transactions continue to be weak’’, Gandhi added.
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