As the equity market hovers near a three-month high, the number of Nifty companies trading above their 200 DMA (Day Moving Average), a long-term indicator for a security, is on a rise. Currently, as many as 34 or 68% of the leading 50 bluechip stocks are trading above this indicator. A further rise in this number, would confirm reviving investor interest in Indian equities given the importance of this pointer in reflecting the underlying market trend.
For example, during February and mid-April 2009, more than half of the Nifty?s current constituents surpassed their respective 200 DMAs, in turn pushing the Nifty closer to its own long-term average. While the Nifty yielded 32% in the period, its gains were extended further for a year, as such constituents continued to increase in number.
Similarly in October 2010 and mid-January 2011, the decline in this number lead the market plunge. The Nifty constituents which managed to stay above their 200 DMAs came down drastically from 96% to just half of total constituents. The Nifty had given up 15% in this period and its fall intensified once the index fell below its own 200 DMA in the last week of January 2011.
In the recent past, the % of 50 Nifty companies which have crossed above their long-term averages is on the rise since last nine weeks. Traders also point out that lately the indicator has worked brilliantly in case of certain stocks like Tata Motors which have taken a respite at their 200 DMA during recent corrections.
? However, the breadth by which a stock surpasses its 200 DMA is more important than the number of stocks that outdoes this indicator,? says Savio Shetty, derivatives trader at Prabhudas Lilladher.
According to Shetty, if a stock is trading about 1% higher than its long-term average, that may not necessarily confirm a bullish stance. ? Such breadth can turn negative very easily if the Nifty starts to correct significantly. Stocks trading about 5-6% higher than their 200DMA on the other hand, could reflect a stronger conviction,? he added.
Currently, RIL, Bharti Airtel, Bajaj Auto, Infosys, BHEL, and Jindal Steel & Power are some of the Nifty stocks which are trading 4% to 12% their 200 DMAs. On the other hand, TCS, SBI, HUL and Sun pharma are currently trading 8-10% higher than their long-term indicators.
