The ongoing rally in domestic stocks this November has significantly widened the distance between Nifty and its 50-day, 100-day and 200-day moving averages (DMAs), indicating strength in the bull run.
The 50-share Nifty has jumped 10 per cent to 12,772 as of November 19 from the October 30 close of 11,642. This rally has also taken 980 stocks, which accounts over half of the active stocks in NSE’s listed universe, well above their short and long-term moving averages.
Among individual stocks, Aarti Industries, Aarti Surfactants, Adani Gas, Adani Green, Aurobindo Pharma, Balkrishna Industries, Bata India, Gillette India, Globus Spirits, Hindustan Zinc, HDFC, ICICI Bank, ICICI Lombard General Insurance, Jindal Steel, Larsen & Toubro, Snowman Logistics, SBI, SpiceJet and Tata Motors are all trading above their respective 50 DMAs, 100 DMAs and 200 DMAs.
In general, traders and investors use three major daily moving averages – 50-day, 100-day and 200-day – to spot trend in a stock or an index. When a stock trades above all these DMAs, it is supposed to signal an upward trend. They provide useful information about support and resistance levels.
The 50-,100- and 200 DMAs are used most commonly by traders and analysts. They are used to identify short-term and long-term trends and work as key support and resistance levels for the index.
“Traders tend to prefer 50 DMA and 100 DMA while investors tend to use the 200-DMA more to identify trends. The 200-DMA is a key indicator that determines an overall long-term bull market. Thus whenever an underlying asset takes support or surpasses the 200-DMA, it gives a clear signal of trend reversal and of the right time to enter a stock,” said Nilesh Jain, Technical and Derivatives Research-Equity Research, Anand Rathi Shares and Stock Brokers.
The 200-day moving average, also known as long-term moving average, acts as a crucial support for an index or a stock, while the 100-day average reflects a six-month timeframe and the 50-day average measures a quarter.
Some analysts caution market participants to not use moving averages in isolation. There are various other methods in which such averages and their combinations can be used to gauge the strength and a likely shift in trading momentum.
Mazhar Mohammad, Chief Strategist for Technical Research & Trading Advisory at Chartview India, said when a stock trades above 50-, 100- and 200-day moving averages, it means the scrip is in a strong uptrend.
“But this should not be the sole criteria to decide an entry point. Such stocks can provide great opportunity on corrections, especially when they reach, respect and bounce back from the said averages. Apart from these averages, traders should also make use of other technical indicators while deciding exit and entry points,” he said.
Other indicators such as Relative Strength Index (RSI), Bollinger Bands, Fibonacci Series, MACD, candlestick patterns and stochastic can also be used to make a buy or sell decision.
Milan Vaishnav, Consulting Technical Analyst and Founder, Gemstone Equity Research and Advisory, said high-beta stocks that have seen a sharp run-up should be avoided at this point.
“One should look at stocks with good RSIs. We like pharma, consumption and non-discretionary sectors,” he said.
Stocks like Adani Power, Adani Ports, Aditya Birla Capital, Wipro, Voltas, V-Mart Retail, Wonderla Holidays, VIP Clothing, Varroc Engineering, TVS Motor Company, TCS, Tata Elxi, Tata Steel Long Products were seen trading above these moving averages on Thursday.
“Whenever a stock surpasses all the short-term and long-term moving averages, it reflects a strong uptrend and further momentum. So it is always advisable to give importance to all the moving averages for trading as well as investing. As a thumb rule, if the price is above the moving averages, the trend is upward and if the price is below the moving averages, the trend is downward,” Jain said.
Considering the prevailing bullish trend in the market, Jain said he is bullish on Bata India, Bharat Forge, DLF, Avenue Supermarts, Jindal Steel, Siemens and Voltas.
Ashis Biswas, Head of Technical Research at CapitalVia Global Research, said momentum indicators RSI and MACD are both showing negative divergence as of now. “If Nifty goes below 12,750 level, it may open the gate for a movement till the 12,510-12,520 zone. From a short-term perspective, we retain our cautious stance as the current rally is not supported by other bullish technical evidence,” he said.