On December 15, the market broke the 20-day moving average and one doesn’t know where it's going from here. But if one looks at the broader market, there are some signs that most of the market indices are actually at or below the 20-day moving average.
As investors shy away from markets fearing a recession in the wake of the central bank’s liquidity tightening campaign, Indian indices that showed some resilience on Monday, are back to red on Tuesday (December 20). This is essentially showing the signs of markets remaining down in the third week in a row starting from 5th December.
Dalal Street, on Friday (December 16) last week, ended at one-month low and ended lower for the second day in a row. Could the Nifty, below 20-day moving average (DMA) spell trouble for the bulls and at current valuations what kind of returns can one expect from Nifty in 2023 and is the PSE index on the verge of a multi-decadal breakout?
The market is not looking good, especially the last couple of days were brutal. On Thursday, the market preempted a lot of Friday decline but on Friday, the market attempted two rallies and both were sold into. The message was loud and clear. And even in the US, the market got a bit cocky about what Jerome Powell was about to say and how the market reacted to that. And next day, it had a bit of a reality check.
The market has decisively broken the 20-day moving average (DMA). On Thursday, it looked like maybe it still wants to give it one more day. But on Friday, the way it effortlessly broke that - and the two rallies were sold into - anecdotally what happens is the break of 20-day moving average leads to a sharp fall. – there are numbers to back it but before that the Bank Nifty just about managed to close right at the 20-day moving average, in fact the Bank Nifty’s close was prevailing 20-day moving average. So one would still want to give benefit of doubt to the Bank Nifty because it's the leadership index. But let's look at the last few instances of the 20-day moving average break downs. Most of this have been seen this year only.
Starting with January - on January 21, the Nifty broke the 20-day moving average, and after that it had a 7.8 percent decline over a two month period. After that, market reclaimed that. And then in on April 18, another 20-day moving average breached and this time also the Nifty fell 7.8 percent. This time the fall was a bit shorter in duration. Come June 13, the Nifty again broke the 20-day moving average and this time the fall was 6.8 percent. Again, this time, the fall actually lasted for slightly longer duration. And this is what would give hope to the bulls that the next breach of 20-day moving average was a temporary one on August 29 when it breached it and fell only about 3 percent and bounced back immediately after that.
So on December 15, the market broke the 20-day moving average and one doesn’t know where it's going from here. But if one looks at the broader market, there are some signs that most of the market indices are actually at or below the 20-day moving average. The midcap index is right at the 20-day moving average, metals index is at 20-day moving average, FMCG index is very close to breaking it, just half a percent above that.
Indices which have already broken that are pharma, auto index, no prizes for guessing - IT index 3.5 percent below the 20-day moving average, the two indices which are managed to do well, capital goods, which still on Thursday was almost at lifetime high - is still 2 percent above its 20-day moving average. And again, no surprises for guessing the strongest index the PSU bank index, which is 5 percent above its 20-day moving average. So these are few indices.
In terms of stocks - again, HCLTech, Infosys, the ones which are the weakest below the 20-day moving average, Kotak Mahindra Bank as well down about 4 percent, stocks with strength Oil and Natural Gas Corporation (ONGC), IndusInd Bank and Larsen and Toubro (L&T) –L&T even in Thursday’s trade made a lifetime high. Now the stocks that one has been watching out for, which are at a make or break zone, right in the 20-day moving average, the close today was at the 20-day moving average, what are these stocks? State Bank of India (SBI), HDFC Bank, both of these stocks are right at the 20-day moving average. Reliance, ITC and ICICI Bank, the three stocks which have led the market rally, they're now 2 percent below the 20-day moving average. If these stocks correct a bit more then the market is in for a sharper correction. That's what the anecdotal data indicates. Let us see if this time it is different or not.