Kshitij Anand, ECONOMICTIMES.COM May 20, 2016, 02.30PM IST
NEW DELHI: The Nifty50 slipped a little over 2 per cent so far in calendar 2016 and is now trading near its 200-DMA placed at the 7,800 level on the daily charts, which suggests the index is losing momentum.
Almost 367 stocks , which account for over 70 per cent of the S&P BSE500 index, are trading well below their 200 DMAs, which suggests the selling pressure is now across sectors.
Stocks that are trading below their 200 DMAs include names like 3M India, ABB India, ACC, Aban Offshore, Andhra Bank, Bank of Baroda, Bharti Airtel , Coal India , DB Corp, Corporation Bank, MRF, PC Jeweller, Pfizer , Wockhardt , Yes Bank and ZEE Entertainment , among others.
Moving averages are a powerful tool for analysing the trend of a stock or even an index. They provide useful information on the support and resistance points.
The most common timeframes taken by traders to consider moving averages are 200 days, 100 days, 50 days, 20 days and 10 days.
“Understanding and use of all these moving averages depends upon the user and his comfort level in applying the same. But most commonly used moving averages like 50 DMA, 100 DMA and 200 DMA provide clarity on the trend to get a trade setup for optimising return,” Chandan Taparia, Derivatives Analyst – Equity Research, Anand Rathi Financial Services , told ETMarkets.com.
The 200-day average, also known as long-term moving average, acts as a crucial support for the index or a stock, while the 100-day average reflects a six-month timeframe, the 50-day average measures a quarter while a 20-day average measures a month and 10-day average two weeks.
The rule of thumb is that if a stock or an index is trading above its 200-DMA, it is considered a bullish trend and vice-verse. But traders should combine moving averages with other parameters or price patterns while making investment decisions.
So far this year, Nifty bounced back four times after hitting its 200-DMA. The index first hit its 200-DMA on April 25 and then it took support at that level and witnessed a jump of over 100 points to 7,994 (intraday).
Should moving averages be used for making investment decisions? Well, those who pick stocks based on technical analysis always follow certain price patterns, indicators and oscillators and all of them should be looked at before making investment decisions.
“If the majority of the scrips are trading below their 200-day moving averages, then it suggests inherent weakness in the broader Market as without their participation it will be difficult to have long and sustainable rallies,” Mazhar Mohammad, Chief Strategist – Technical Research, Chartviewindia.in told ETMarkets.com.
“It also means that it is stock pickers’ market in which traders need to concentrate on stock-specific ideas. At no point, scrips below 200-day moving averages should be considered as a value buying opportunity,” he said.
There stocks have not moved up as they have failed to draw the attention of main market participants, technical experts said. The reason could be both technical as well as fundamental.
“As and when short-term moving averages make a bullish crossover above its longer-term moving average, the best way is to use various combinations of moving averages to create positions. For instance, a crossover of 13 above 34 may suggest a short-term uptrend,” said Mohammad.