Is that sinking feeling returning yet again after six months? Well, technical indicators for India’s biggest stocks do point to the shortening odds on a prolonged correction in local equities.

More than half the NSE 500 stocks have slipped below their 200-day moving average (DMA) after the week-long selloff triggered by persistent worries of the second wave of Covid-19 and the strengthening of the US dollar NSE 2.20 %. Also, about 170 of the top 500 stocks are currently trading more than 10 per cent below their 200-DMAs, signalling broader weakness. 

Index heavyweights HDFC Bank, Hindustan Unilever (HUL), HDFC, Kotak Mahindra Bank, ICICI Bank, Bharti Airtel, ITC, Bajaj Finance and Nestle India are currently trading below their 200-DMA.

Majority of the banks and non-banking financial institutions are currently trading below their 200- DMAs. Banks and NBFCs had been under pressure for quite some time and Covid-19 has significantly dented the earnings/asset quality outlook, resulting in a steep correction in their stock prices. Bank Nifty has declined 10.4 per cent in the last one month and 32 per cent in the past one year.

“The weakness in the broader markets and huge underperformance of banking, financial services, and capital goods sectors have led to a lot of stocks trading below the 200-day averages,” said Vikas Jain, analyst, Reliance Securities.“There are multiple supports in the range of 10,650-10,750…We expect the market to witness some time-wise correction and consolidation after a sharp fall over the past two weeks.”

While the Nifty 50 index has fallen nearly 7 per cent since September 16, Nifty Midcap 100 and Smallcap 100 indices fell 8 per cent and 9 per cent, respectively, during this period. Nifty50 is currently trading just half a percent above its 200-DMA while Nifty Midcap 100 and Smallcap 100 are 4 per cent and 9 per cent ahead of 200-DMA.

 Since 200-DMA is a long-term average, it is considered a major support level for an index or stock.

Experts warned that more stocks could fall into a bearish trend if the panic selling continues.

“The markets had already raced ahead of valuations and it is possible that we may see more correction,” said Abhimanyu Sofat, head of research at Securities. “I see strong support at 10,800 if the market were to weaken from here.”

People have stocked up on defensive stocks, and that pack which has stayed resilient, may also feel the heat while cyclicals will be hammered further.”