Is the Indian Stock Market Oversold Territory?

Market Outlook
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By Brijesh Bhatia (@bbrijesh9/X)

Pune, 26th October 2024: Financial markets are inherently emotional, often swaying between two dominant feelings—Greed and Fear. Recently, the Nifty index has declined by more than 2,000 points from its peak of 26,277 as Foreign Institutional Investors (FII) sold to the tune of Rs.1,00,242crs in the month of October so far. This significant downturn has altered market sentiment from one of optimism—where investors were quick to buy the dip—to a more cautious and fearful stance, leading many to sell during any recovery.

The Emotional Nature of Markets

Historically, market reactions to both positive and negative news tend to be emotional in nature. A recent surge in investor enthusiasm drove stock prices upward, sometimes leading to overvaluations. Conversely, as prices fell, fear took hold, prompting many to liquidate their holdings in an effort to limit losses. While this shift can create challenges, it offers valuable buying opportunities for those who carefully analyse market conditions.

In light of the current climate of uncertainty, it’s important to consider technical indicators such as the Death Cross and to determine whether this is a moment for cautious strategies or a time to embrace calculated risks.

The Death Cross is a well-known technical signal suggesting a shift from bullish to bearish market conditions. It occurs when a short-term moving average crosses below a long-term moving average, typically signified by the 50-Day Moving Average dropping below the 200-Day Moving Average. This occurrence is often seen as a warning of potential further declines.

However, evaluating the Death Cross within the broader market context is crucial. Here’s a breakdown of how many stocks within various indices are currently reflecting this signal:

Nifty50: 1 stock (2%)

Nifty100: 8 stocks (8%)

Nifty200: 25 stocks (12.5%)

Nifty500: 86 stocks (17%)

Midcap150: 23 stocks (15%)

Smallcap250: 55 stocks (22%)

These numbers indicate that while some stocks show bearish signals, a considerable number still exhibit positive trends, particularly with the presence of Golden Cross formations.

Interestingly, the percentage of stocks demonstrating a Death Cross is relatively small compared to the broader indices, implying that many stocks may still have upward potential.

Market Trends and Retracements

It is essential to understand that stock markets do not move in a straight line. They experience fluctuations, known as retracements, which are vital to the overall trend.

According to Dow Theory, market movements can be divided into primary and intermediate trends. The primary trend represents the market’s long-term direction, while intermediate trends are shorter-term fluctuations within that broader movement. Retracements often signal temporary reversals or consolidations, allowing investors to reassess their positions and strategies.

Given the current market conditions, a key question arises: Should one give in to fear, or should one explore the opportunities that may be available?

Analysing the Nifty500

Analysing the Nifty500 chart reveals some interesting setups.

NIFTY 500 chart

Source: Tradepoint, Definedge Securities

The Advance-Decline Ratio is currently positioned in an oversold zone, which can often signal a potential reversal in market sentiment.

The Advance-Decline Ratio Line measures the balance between advancing and declining stocks. A significant point to consider is that when the AD Line falls below 10, it historically indicates a possible reversal in market momentum on the Nifty500.

For the Nifty500, such a reversal could restore positive sentiment, particularly as we approach festive periods that typically foster a more optimistic investor outlook.

Additionally, the Nifty500 index is currently trading above its long-term 200-Day Exponential Moving Average (DEMA), suggesting that dips are a normal aspect of market behaviour rather than a cause for concern.

A Thoughtful Perspective

Maintaining a balanced outlook is important in the current market momentum. While the emotional aspects of markets can lead to hasty decisions driven by fear, it is essential to recognise the potential opportunities that can arise during corrections.

With the Nifty500 currently trading above its 200-Day Exponential Moving Average (DEMA) channel and the Advance-Decline Line falling below 10, we may be on the brink of a potential reversal. However, the actions of Foreign Institutional Investors (FIIs) in the coming days will be critical to monitor. While a reversal could entice optimistic investors back into the market, it’s important to remember that unchecked greed can be risky.

Disclaimer: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. This article is strictly for educative purposes only.  As per SEBI guidelines, the writer and his dependents may or may not hold the stocks/commodities/cryptos/any other assets discussed here. However, clients of Definedge may or may not own these securities.

(About Writer: Brijesh Bhatia has over 18 years of experience as a trader and technical analyst in India’s financial markets. He is a well-known face in the business channel as a Market Expert and has worked with broking giants like UTI, Asit C Mehta, and Edelweiss Securities. He is currently a Senior Research Analyst and Editor at Definedge.)