Are technical indicators flagging deeper weakness across Nifty 500 stocks?

Mumbai: Technical momentum indicators after the recent stock market selloff are pointing to a weakening undertone in the country's top 500 shares. The majority of the stocks on the Nifty 500 index are trading below their short- and long-term moving averages, according to ICICI Securities, signalling broad-based weakness. Out of the 500 shares, 70% are trading below the 50 day moving average (DMA) while 60% are below their 200 DMA, the data said. When an index or a stock is below 50 DMA, it reflects a loss of short- to medium-term momentum and vice versa. It represents the average closing price of a stock over the past 50 trading days. Similarly, a stock or index below the 200 SMA signals a weakening long-term trend. The decline in the majority of the stocks is below both the 50- and 200-DMAs, showing short-term momentum has faded, and the longer-term trend is under pressure, suggesting sellers might be dominating across sectors. Earlier this month, when the Nifty hit all-time highs, 54% of the stocks in the Nifty 500 universe were trading above both the 50- and 200-DMAs. "Over the past week, broader selling pressure has weakened the market breadth further," said Dharmesh Shah, head of technicals at ICICI Securities. Equities have been weighed down of late by intensifying concerns over the delay in a trade pact between the US and India. Donald Trump's support for a Bill that advocates a 500% tariff on imports from countries such as India and China that purchase Russian oil spooked investors last week, though the uncertainty eased after US ambassador to India, Sergio Gor, said India and the US will discuss trade issues soon. 126515282Market breadth Nifty is down nearly 2% since its new all-time highs made on January 5 and has declined 2.5% in the past week. On Tuesday, the index ended 0.2% lower at 25,732.3. "The market witnessed corrections for five consecutive sessions last week, given the lack of clarity on the India-US trade deal and the global uncertainties. While there was some respite on Monday, the markets slipped again on Tuesday as market volatility imbued selling pressure," said Nilesh Jain, head of derivatives and technical research, Centrum Broking. Jain said that in the near term, while a pullback or dead cat bounce is likely, a decisive up-move is not anticipated currently. "The small-cap index itself is trading below both long-term and short-term averages, so most of these stocks are below the 200 DMA," said Jain. "Investors are advised to avoid small-cap stocks and focus on large-cap stocks where the margin of safety is higher." Analysts said extreme readings of the moving average indicators also point to trend reversals. "With only 30% of Nifty 500 stocks now trading above the 50-day SMA, we are approaching oversold territory, which can be a good opportunity for investors to buy quality names with strong earnings, with a medium-term view," said Shah. Historically, market breadth has bottomed out when the percentage of stocks above the 200-day DMA goes below 15%, and rallies tend to exhaust themselves only when this figure climbs near 90%, he said.