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Theory suggests that as long as stocks trade above their 200-DMA, the overall trend is considered bullish, while it is exactly the opposite if it is trading below their 200-DMA.
The Nifty hit a fresh record high (above 11,400) for the first time this week and the Sensex rallied above 37,800 on Monday. Benchmark indices might be hitting record highs but only a handful of stocks are trading above their 200-day daily moving average (DMA), a situation similar to 2008.
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This technical gauge is considered as one of the most important indicators by traders and chartists to determine the long-term trend of a stock or an index. Theory suggests that as long as stocks trade above their 200-DMA, the overall trend is considered bullish, while it is exactly the opposite if it is trading below their 200-DMA.
Data suggests that as many as 1,720 stocks were trading below their 200-DMA in 2018 and only 160 stocks were trading above their crucial long term average. In January 2008, when markets hit a record high, 1,300 stocks were trading below their 200-DMA while only 583 stocks were trading above their crucial long term average, according to data collated from AceEquity.
The data points to a common theme which is ‘divergence’. Only a handful of stocks are taking markets higher while the majority of the market is still trading below this crucial level in 2008 as well as in 2018.
Even though data points to a common theme, most experts feel we are unlikely to see a steep correction like the one we saw in 2008 and long term investors have nothing to worry about.
“Without any doubt, based on technical evidence with us, we can categorically say the current phase is not similar to 2008 and just based on one single criterion we can’t jump to such conclusions,” Mazhar Mohammad, chief strategist – technical research and trading advisory, chartviewindia.in, said.
Let’s not forget that the top of 2008 was made after a multi-year uptrend which in that bull market multiplied indices by almost 10 times.
“Based on our long term trend analysis and Elliot Wave projections, we can confidently conclude that one more multi-quarter leg on the upside is pending in this bull market which can take the indices initially beyond 12,200 levels. Time-wise, it may well get extended to another 12-18 months,” he said.
Mohammad added it is true that number of scrips are trading below their 200-day moving averages as of now as mid and smallcap space was bruised and battered in the recent correction they appear to be on the verge of a turnaround on the charts.
From the period starting from May to mid-July, the market saw a clear divergence between the benchmark index and the broader market indices. The Nifty was in a consolidation mode during the period whereas the midcap and smallcap indices tumbled significantly.
This caused a lot of stocks to fall below their respective 200-DMAs, suggest experts. “The divergence ultimately played out in the direction of the benchmark index. As a result, we are witnessing a substantial rally in the market since mid-July.”
“The stocks that are trading below the 200-DMA are heading towards the key long-term moving average. Similar divergence existed in the market towards 2008-end. The benchmark index bottomed in October 2008, whereas the broader market continued to correct till early 2009,” Gaurav Ratnaparkhi, senior technical analyst, Sharekhan by BNP Paribas, said.
“The divergence, at that time, also played out in the direction of the benchmark index; thus pulling the stocks above their 200 DMAs somewhere during mid-2009. The difference between 2008 and 2018, however, is in the degree of occurrence. The correction in 2008 was a much larger piece in the entire puzzle as compared to the current one,” he said.
However, not everyone is convinced and feel that Nifty could be heading for a bigger decline in the near term because conditions do look similar to 2008. There is immense volatility in the market with micro factors propelling the markets to newer highs, while the macros are still catching up, experts added.
“The conditions do look similar to 2008 as largecaps have been experiencing a euphoric rally, while the midcaps and smallcaps have lagged the broader market and are showing large divergence. Historically, when markets have made tops in the US and India, a large divergence has been observed which signifies the 5th wave of the Elliott Wave Theory,” Jimeet Modi, chief executive officer and founder at Samco Securities & StockNote, said.
“A similar situation is being experienced currently with a handful of stocks trading above their 200-DMA. There is a higher probability the markets will react like 2008 eventually. Micros are pushing the market to new highs while the macros such as the increase in interest rates, rising inflation, depreciating currency and widening current account deficit are leading to greater fear in the Indian economy. The market needs a trigger before it starts its downward journey and when that will occur only time will tell,” he said.
The views and investment tips expressed by investment experts are their own and not that of the website or its management. Users are advised to check with certified experts before taking any investment decisions.