Oversold and overlooked: Emerging opportunities in this fearful market

Economic indicators and investors’ emotions, primarily greed and fear, drive financial markets. Recently, the Nifty 50 index experienced a decline of over 2,000 points from its peak of 26,277, largely influenced by substantial selling from foreign institutional investors (FIIs), who liquidated cash holdings worth over ₹1.2 trillion in October.

Market sentiment has moved from a bullish optimism, where investors actively bought the dips, to a more cautious, fearful approach, prompting many to sell during any sign of recovery.

The emotional market sentiments

Market response to news, whether positive or negative, is often coloured by emotional reactions. For instance, a surge in investor confidence can lead to rapid price increases, sometimes resulting in overvaluations. Conversely, when prices begin to fall, fear can drive investors to liquidate their holdings to minimise losses.

While such emotional volatility can pose challenges, it can also present unique buying opportunities for those who analyse market conditions thoughtfully.

In light of current uncertainties, investors are advised to consider technical indicators such as the ‘death cross’—a signal that typically indicates a transition from bullish to bearish market conditions.

Evaluating death cross & golden cross

The death cross occurs when a short-term moving average drops below a long-term moving average, often represented by the 50-day moving average falling beneath the 200-day moving average. This technical formation often serves as a precursor to further market declines.

Conversely, the golden cross occurs when the 50-day moving average exceeds the 200-day moving average, indicating a bullish setup. 

Also Read: Is this the end of the bull market?

To contextualise the death cross and golden cross within the current market environment, let us explore the prevalence of this signal across various indices:

These figures indicate that while some stocks sign bearish trends, a substantial number still show resilience and bullish trends even when the markets are correcting. The presence of golden cross formations in other stocks underscores this potential for upward momentum.

The readers should understand the stocks may be trading below the 50DMA and 200DMA with the golden cross, which doesn’t confirm the bearish reversal.

Also Read: 3 companies that could pay big dividends

Market trends and retracements

It’s crucial to recognise that stock markets don’t move in a straight line; they undergo fluctuations known as retracements, which offer opportunities in the overall trend.

According to Dow Theory, market movements can be segmented into primary trends representing the long-term direction and intermediate trends reflecting shorter-term fluctuations. Retracements often signify temporary reversals or consolidations, offering investors a chance to reassess their strategies.

The Nifty500 chart reveals several intriguing setups that could influence market sentiment.

The advance-decline ratio is currently in an oversold zone, often signalling a potential reversal. The advance-decline line measures the balance between advancing and declining stocks. Historical patterns indicate that when the AD Line falls below 10, it can herald a reversal in momentum, particularly for the Nifty500.

Given that the Nifty500 index remains above its long-term 200-day exponential moving average (DEMA), current price dips can be interpreted as typical market behaviour rather than an immediate cause for concern. This positioning might encourage investors to view any downturns as potential buying opportunities.

For more such analysis, read Profit Pulse.

Maintaining a balanced outlook is key in the current market volatility, as fear influences emotions that can eventually lead to rash decisions. However, it is important to recognise the potential opportunities from the long-term trend these corrections can yield.

With the Nifty500 trading above its 200-day exponential moving average and the advance-decline line indicating oversold conditions, a potential market reversal may be on the horizon. Nonetheless, the subsequent actions of foreign institutional investors will play a critical role in shaping future market dynamics. While a reversal might entice optimistic investors back into the fold, it is essential to tread carefully, as unchecked greed can lead to risky decisions.

Note: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. 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 thesesecurities.

Brijesh Bhatia has over 18 years of experience in India's financial markets as a trader and technical analyst. He has worked with the likes of UTI, Asit C Mehta, and Edelweiss Securities. Presently he is an analyst at Definedge.

Disclosure: The writer and his dependents do not hold the stocks discussed here. However clients of Definedge may or may not own thesesecurities.