For devout followers of technical analysis, the latest round of meltdown in Indian equities, which started around May 20, is much more damaging than the crash in January this year. For, if the weakness in January could have been attributed to a bull market correction, the downswing in the last few trading sessions increasingly hints at a fullfledged bear market. A thorough analysis using moving averages — the most important trend indicator — validates this view.
In technical terms, the 20, 50 and the 200 day moving average (DMA) are generally seen as the short-, medium- and the long-term trend indicators . Life above a moving average is viewed as bullish and while that below the moving average shows signs of an impending fall. The current leg of the down move has once again pushed the Nifty below all three of these important indicators.
In fact, at close on Wednesday, all NSE indices except the CNX IT are trading below each of their respective 20, 50 and 200 DMAs. A closer look makes things even scarier for bulls. Of the 50 stocks that make up the Nifty, 33 are trading below their respective 20, 50 and 200 DMAs and hence, can be concluded to be in a bear market. While 15 stocks are stuck in no man’s zone — trading above one or two but definitely below at least one of these important indicators — only two stocks, Infosys and Ranbaxy, are trading above all of their respective 20, 50 and 200 DMAs and so, still continue to be in a bull market.
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If you thought the ratio of 33 to 2 looks frightening, a closer look at the ratio of the weightage that these laggards have in the Nifty to that of the weightage of the 2 leaders is even more spine chilling. With heavyweights like Reliance Industries, ONGC and NTPC, which together make up a quarter of the Nifty, well below each of their respective 20, 50 and 200 DMAs, 71.95% of the Nifty can be labelled as being in a bear market, with only a measly 4.57% still in a bull market. And so, the journey of the Nifty back over its 200 DMA, which at close on Wednesday is at around 5,220, looks a tall order, at least in the near term.
That even the big daddy of benchmark indices — the Dow Jones Industrial Average — and most other major global indices like the FTSE 100, the Hang Seng and the Shanghai are all trading below their respective 200, 50 and 20 DMAs only further highlights the global nature of the ongoing bear hug. Back home, what is worrying bulls even more is the southward journey of Reliance Industries. Often considered as the pulse of Indian equities, RIL along with the Nifty is now trading well below its 50 WMA (weekly moving average).
In fact, if you exclude a solitary week in March, this is the first occasion since the beginning of 2005 that RIL is trading below this major support. Even for the Nifty, the situation is exactly the same as this is the first time since the beginning of 2005, except for March and April, that the Nifty is trading below its 50 WMA. Just how important a support this is, can be gauged from the fact that although during the crash of May 2006, March 2007 and August 2007, the Nifty had gone below its 50 WMA on a few occasions, it had always managed to bounce back above it by the end of the week.
