Stock Market Crash, An Opportunity?
By Brijesh Bhatia (@bbrijesh9)
Pune, 7th November 2024: The Indian stock market is going through a tough phase, with the Nifty50 recently dipping below the 24,000 mark, hitting a four-month low and causing concern among retail and institutional investors. In October, the index fell sharply by 6.22%, mainly due to substantial outflows from Foreign Institutional Investors (FIIs), who sold shares worth ₹1,14,446 crore. Meanwhile, Domestic Institutional Investors (DIIs) tried to mitigate the impact by purchasing shares worth ₹1,07,254 crore, but their efforts were not enough to arrest the fall in prices.
The Current Market Scenario: Bearish or Just a Retracement?
The significant drop in the Nifty50, particularly following its peak of 26,277, has led many retail investors to question whether this signifies the end of the bullish cycle that commenced in April 2023. The Nifty50 has pulled back approximately 9% from its peak, prompting speculation on whether the market will continue its downward trajectory or is merely a temporary setback—a standard retracement before the next upward move.
During broad market corrections, it’s essential to recognise that not all sectors or stocks move uniformly. A market-wide sell-off influenced by external factors, such as FIIs withdrawing funds, can still allow certain sectors or individual stocks to defy the broader trend.
This phase offers a unique opportunity to spot stocks that may be temporarily oversold but still carry strong long-term potential, especially in sectors that continue to grow despite the broader market decline.
Strategy for Finding Bullish Stocks Amidst Market Correction
To assist investors in identifying potential opportunities, we will look for stocks that meet two key criteria:
- Golden Cross on the Daily Chart
- Oversold RSI (Relative Strength Index)
Let us break down these two technical indicators and understand why they are crucial in this current market context.
- Golden Cross: The Indicator of a Long-Term Bullish Trend
A Golden Cross occurs when a stock’s short-term moving average (50-Day Moving Average) crosses above its long-term moving average (200-Day Mving Average). This is generally considered a bullish signal, indicating a shift from a downtrend to an uptrend. The Golden Cross reflects that the stock has overcome short-term selling pressures and is likely to continue moving upward over the medium to long term.
In the current bearish market, a stock that has formed a Golden Cross amidst an overall correction can be viewed as a potential leader once the market stabilises. These stocks have demonstrated strong upward momentum and are more likely to outperform their peers once market sentiment improves.
- Oversold RSI: Identifying Short-Term Exhaustion
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. It is typically used to identify whether a stock is overbought or oversold. Typically, RSI value above 70 is considered overbought, while value below 30 is considered oversold.
When a stock’s RSI is below 30, it indicates that the stock has been sold off excessively, possibly due to short-term market sentiment or external factors. For traders looking to capitalise on short-term rebounds during market corrections, stocks that have entered the “oversold” zone could present an attractive entry point, particularly when combined with the long-term bullish trend signalled by a Golden Cross.
The combination of a Golden Cross and an oversold RSI is extremely potent. The Golden Cross suggests that the stock is in a bullish trajectory, while the oversold RSI suggests a short-term dip.
The Chart Setup
Stocks to Add to Your Watchlist: Nifty500 Candidates
For readers interested in identifying stocks that fit the criteria above, here’s a curated list of stocks from the Nifty500 basket that should be watched during this correction phase. We ran a scanner in RZone to filter the stock, qualifying the setup discussed above.
(Note: These stocks should be analysed further based on individual risk tolerance, and readers are encouraged to conduct due diligence or consult with financial advisors before making any investment decisions.)
Here is the list of stocks from Nifty500 that qualify for the above criteria.
*Data as of the close of 4th November 2024.
A Tactical Approach in a Bearish Market
Buying in the bearish market can be the riskier decision, but as they say – “Risk hai to Ishq hai”
While the short-term market trend may be down, stocks with strong long-term bullish trends have temporarily dipped due to short-term market sentiment. By focusing on stocks that meet the criteria of a Golden Cross and an oversold RSI, readers can position themselves to benefit from both short-term rallies and long-term growth.
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.)
