Sensex in strong bull zone as 26 stocks trade above their 200 day moving average

The rising Index, with a high number of constituents participating, confirms a bullish trend and sustainability of the Index at higher levels, say some experts. However, one fund manager says the data hides more than it reveals, given that the returns so far have been abysmal.

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The BSE Sensex reached a fresh all-time high on November 24 when it kissed 62,412. The previous all-time high of 62,245 was achieved over a year ago, on October 19, 2021. Since then, the equity markets have faced a lot of upheaval, for a plethora of reasons.

However, off late, things have taken a turn for the better, and with the return of foreign portfolio investors (FPIs), the strength of Indian markets has improved manifold. This can also be gauged from the fact that on November 24, of the 30 constituents in the BSE Sensex, 26 stocks were trading above their 200-day moving average (200 DMA). One stock was at its 200 DMA and only three stocks were trading below their 200 DMA.

Significance of the 200 DMA

The 200-day moving average is represented as a line on charts and represents the average price over the past 200 days (or 40 weeks). The moving average is commonly used in stock trading to determine the general market trend and can give traders a sense of whether the trend is up or down, while also identifying potential support or resistance areas. As long as a stock price remains above the 200-day DMA on the daily time frame, the stock is generally considered to be in an overall uptrend.

“This also acts as a support when the prices are above the DMA and resistance when the prices are below the DMA,” explained Divam Sharma, Founder, Green Portfolio.

What does the current situation indicate?

The percentage of stocks trading above a specific moving average is a breadth indicator that measures internal strength or weakness in the underlying index. This indicator measures the degree of participation. Breadth is strong when the majority of stocks in an index are trading above a specific moving average. The 200-day moving average is used for medium-to-long-term timeframes.

Twenty-seven of the 30 stocks are above / at their 200 DMA, which means 90 percent of the Sensex stocks are above the 200 DMA.

According to Vinay Rajani, CMT, Senior Technical and Derivative Analyst, HDFC Securities, “any reading above 50 percent is considered to be a bullish indication as far as breadth of the market is concerned and a rising Index with a high number of constituents participating confirms the bullish trend and sustainability of the Index at higher levels”.

However, Manish Jain, Fund Manager, Coffee Can PMS, Ambit Asset Management, has a different perspective. “The Nifty is close to touching a new high now. However, this data hides more than it reveals; the returns so far have been abysmal ~5% only, and what the market has done very effectively is rotate bullishness between sectors. IT & Metals, which were the best performing sectors last year, are at the bottom of the table right now and vice versa for FMCG,” he said

Why some stocks are trailing their 200 DMA

Despite the overall strength displayed by almost all the index constituents, there are three stocks that have not yet been able to break above their 200 DMA. The stocks of IT majors Tech Mahindra and Wipro are trading close to Rs 70 below their 200 DMA while Tata Steel is just over Rs 4 lower than its 200 DMA price. What is preventing these stocks from breaking this crucial daily moving average?

Historically it has been observed that every bull run has its own peculiar themes or charioteers. “Like previous rallies, IT was certainly not part of the recent upward leg and in fact, if it had contributed even a little, the benchmark index would have been at least 4-5 percent higher from current levels,” said Sameet Chavan, Chief Analyst, Technical and Derivatives, Angel Broking.

According to Jatin Gedia, Technical Research Analyst, Sharekhan by BNP Paribas, “The Nifty IT index broke below its 200 DMA during mid-April 2022 and since then it has been trading below that. But, despite the recent pullback among IT sector stocks, the Index is still trading below the 200 DMA, which currently stands at 30300 (as per closing on November 24)”.

This means that Tech M and Wipro trading below their respective 200 DMAs is in line with the sectoral performance.

Also, as far as Metal stocks are concerned, a terrific run was witnessed in calendar years 2020 and 2021, when prices moved abruptly. That euphoria had to subside sooner or later. Geopolitical concerns with respect to the Russia-Ukraine war became the catalyst and hence, we have witnessed a strong correction in this entire space.

“As far as Tata Steel is concerned, it has been below its 200 DMA since May, while the Metal Index is above its long-term average, which shows the underperformance of Tata steel,” Gedia added.

Nevertheless, “both these spaces are trying to find their mojo back and soon we will see good participation from IT as well as metal stocks”, added Chavan.

Near-term outlook

The majority of the Sensex constituents trading above their respective long-term averages indicates that the long-term trend is turning in favour of the bulls and their 200 DMA will act as a support zone and dips towards it will provide a potential entry point for long-term investors.

According to Rajani, both Indices have been forming higher tops and higher bottoms and have been holding above important moving averages. “The Nifty has confirmed a bullish inverted head and shoulder pattern on the weekly charts, which projects a healthy upside from current levels. On the monthly charts, the Nifty is on the verge of confirming a ‘Flag’ pattern breakout, which indicates continuation of an upward primary trend,” he said.

For the Nifty, 18,100 has become a strong support for the short term, say experts, and the next upside targets are seen at 18,735 and 19,214, which happen to be the 61.8 percent and 76.4 percent Fibonacci extension levels of the recent swings. While the index may gradually reach towards this target, experts expect majority participation from the Mid and Smallcap segment, which has underperformed for the last on-and-a-half months.

Experts continue to remain sanguine on the near-term outlook. The banking index has already entered uncharted territory and in a matter of time, the Nifty could be seen scaling new heights.

“Once we clock fresh record highs, apart from heavyweights, one should keep a close eye on the broader end of the spectrum, which has been quiet for some time now, and the way the Nifty Midcap 50 index is placed, we are likely to see some flamboyant moves in the mid and small cap baskets,” opined Chavan.

Disclaimer: The views and investment tips of investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.