The Indian market has been under pressure amid rise in COVID cases, rate hike fears from the US Fed, high valuations, and profit taking. This situation has persisted since October when the benchmark indices last touched their respective record highs.

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The Nifty50 has fallen by over 7 per cent from the recent high of 18606 recorded in 19 October 2021, and is trading below crucial moving averages such as 30,50 & 100-Days Moving Averages.

The Nifty50 is still trading above its long-term moving average placed at 16142, but there are 188 stocks in the S&P BSE 500 index that are trading below this crucial long term average – a possible sign of a trend reversal.

There are 5 stocks that have more than doubled wealth in the last year are also trading below their respective 200-DMA. The list includes names like Hindustan Copper, Intellect Design, HEG, MMTC, and Alkyl Amines Chemicals.

The 200-day moving average is used by market participants to determine long-term trends and is one of the popular indicators to study price behaviour in the long run.

Even though the price might have moved below the crucial long-term moving average analysts advise investors to stay put, and book profits where the management quality could be in question.

A close below 200-DMA suggests that the underlying which could be a stock or index has reversed the trend or has entered a downtrend.

“In a bull market 200-DMA acts as strong support but sometimes stocks slip below their 200-DMA and we can't generalize the fact that if stock slips below its 200-DMA then we should exit it,” Santosh Meena, Head of Research at Swastika Investmart Ltd, said.

“Investors should exit stocks that have some quality concerns and move into high-quality stocks with better growth prospects and reasonable valuations because money can't be made in a bull market by sitting on the sideline due to short-term volatility,” he said.

What should investors do?

Nearly 200 stocks in the S&P BSE 500 index are trading below the long-term moving average, and most of the stocks are from the small & midcap space.

A close below 200-DMA should be taken as a sign of caution, but it should not be interpreted as a sell call. Investors can look at reducing exposure, and should evaluate other parameters before pressing a buy or a sell button.

“Stocks which have provided phenomenal returns in short term usually witness higher volatility in corrective phases. One should at least reduce exposure in such stocks which are prone to higher volatility and belong to mid-cap/small-cap category,” Ruchit Jain, Lead, Research, 5paisa.com, said.

The 200-day moving average is used by market participants to determine long-term trends. It helps traders to identify potential support or resistance areas.

“One should not make any investment decisions only based on this one average. The price movement should be analyzed along with its recent volumes and only such stocks where volumes are high on upmoves and low on corrections could be good buying potentials around their 200 DMA,” he said.

Technically, 200-DMA is a very critical support level because most institutional investors like to accumulate their favorite shares around this level. Historically, this level has acted as a strong support and a strong bounce back can also be seen around this level, suggest experts.

“In a strong bull market, 200-DMA acts as very strong support at any meaningful correction and it is generally considered that if any stock slips below its 200-DMA then the overall trend has become weak in the near term,” says Meena of Swastika Investmart Ltd.

“200-DMA alone can't help you to get the right trend because sometimes many stocks fall below their 200-DMA if there is a sharp correction in the market. One should look for other support levels and price action along with some understanding of fundamentals,” he said.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)