When a stock trades above all these DMAs, it is supposed to signal an upward trend.
The recent pullback rally in the market has brought most of the top stocks above their 200-day moving averages (DMA) — a long-term trend indicator. As many as 300 of the BSE-500 stocks are currently trading above their 200-DMAs. In comparison, 300 stocks in the index were trading below their 200-DMAs two months ago.
After declining more than 5 per cent between January 15 and February 1, the Sensex has jumped 3.5 per cent in the last three trading sessions. On Wednesday, the Sensex and Nifty rose 0.9 per cent, while the BSE-500 index gained 1 per cent.
Nearly 40 of the BSE-500 stocks have erased all their 2019 losses and gained 15-50 per cent just in a month. For instance, Indostar Capital, which declined 48 per cent in 2019, has gained 57 per cent since January 1. Wockhardt, which fell 55 per cent last year, has rallied 49 per cent so far in 2020. IRB Infrastructure gained 47 per cent this year after losing 54 per cent last year.
When an index or a stock closes above or below the 200-DMA, it is said to be in a long-term uptrend or downtrend. But, the indicator is also considered to be a reversal sign when too many stocks in an index fall below 200-DMAs.
Analysts caution market participants to not use moving averages in isolation.
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“Top 200 odd stocks have rallied because of institutional inflows, but majority of the stocks outside BSE-500 are still trading below their 200-DMAs,” said G Chokkalingam, CEO, Equinomics Research and Advisory. “It would be no surprise if we see some bouts of correction from higher levels in the coming days”.
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.
