D-Street gets a bit of momentum, don’t take it for long bounce

About 49% of the top 500 stocks on NSE traded above their 50-Day Moving Averages (DMAs) on April 13, against 18% on March 19 — the peak of the West Asia conflict, according to data from Axis Securities.

The 50-day moving average (50 DMA) tracks the average price of a stock or index over the past 50 trading sessions and is widely used to gauge its near-term trend. When a stock trades above this level, it typically signals improving momentum, while a move below it shows weakness. Before the war started, 50.5% of the top 500 stocks were above this key technical level.

ET Bureau

The current reading is far from bullish; still paints a short-term revival from the oversold zone. But the long-term trend indicator is yet to flash optimism. Nearly 67% of the stocks traded below the 200-DMA on April 13, against 77% on March 19.

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A move above the 200-DMA, a widely watched indicator of the longterm trend, is typically seen as a sign of strength, while a fall below it points to weakness. The 200-DMA also tends to act as a key support in bull markets and a resistance in bear markets.

“While the 50-day moving average indicates that there is a recovery in the short term, the long-term trend, despite the reversal, hasn’t turned positive yet,” said Rajesh Palviya, head of research, Axis Securities. “This signals that the investor confidence hasn’t regained decisively yet.”“The worst of the war seems to be priced into the markets, but the majority of the stocks are still very far from their 200-day moving average,” said Rohit Srivastava, founder — strike.money & indiacharts.com. “The recovery is in very early stages, and while it’s attempting to break out, it is not a full-blown revival yet.”

The long-term moving average also acts as a contrarian indicator when readings are extreme on either side. On March 19, about 77% of the stocks were below the 200 DMA, flashing excessive pessimism, according to analysts.

“When 80% of the stocks trade below their 200-DMA, it is generally considered to be extremely oversold,” said Palviya.
In the past 20 years, this has happened on nine occasions, and typically, it was followed by strong returns in the following three months, six months and one year, he said. “The deep correction in a single month has challenged the long-term structure,” said Palviya.

“However, the improvement is likely to take a few months, and we might see new sectoral leaders emerging as well.”