Nearly 77% of NSE500 stocks are trading below their 200-day simple averages (SMA), ET reported.
When a stock price moves below the 200-day moving average, it's considered a bearish signal, indicating a likely downward trend in the stock. When the price moves above, it's a bullish signal.
The 200-day moving average also establishes prices where the stock will, in theory, meet "support" or "resistance."
About 70 stocks, including Wipro (-6.25 %), L & T Infotech, Mindtree (-5.96 %), InfoEdge, L & T Technology Services, HDFC AMC (-3.85 %), Godrej Properties (-4.32 %), SAIL, Zydus Lifescience, Lupin and Jubilant Foodworks (1.68 %), among others, which are trading 25%–75% below their 200-day SMA.
Analysts said the number of stocks below the 200-day SMA and the extent to which they are trading below this level could be signalling extreme bearishness, often seen as a contrarian indicator.
However, experts believe that if the stock of a great company with great management falls below it, those companies will take steps to improve their performance and return to fiscal health – and when that happens, the stock could be sent back up through the 200-day MA, resulting in additional technical buying.
Further, the Nifty 50 has declined 11% since April 1 and is trading 8.38% below its 200-day SMA. Out of the Nifty 50 stocks, 39, including TCS, HDFC Bank, Infosys, Hindustan Unilever, ICICI Bank, State Bank of India, HDFC, Bharti Airtel, Kotak Bank, and Bajaj Finance, are also trading below their 200-day SMAs.
"The market is likely to bottom out in the next one or two weeks, and we may see a sharp recovery," said Rajesh Palviya, head of technical & derivatives at Axis Securities.
Meanwhile, domestic shares plunged on May 19, in line with global peers, as concerns over inflation shattered the risk appetite of investors after UK inflation surged to its highest annual rate in 40 years in April.
The Nifty formed a bearish candle, which indicates further weakness from the current levels.
Analysts warn that extreme moves above or below the 200-day SMAs do not help time the rebound. Investors must spread out their purchases in this situation, they said.