Technical Analysis on Stock Market
By Pinkerala News Desk | Nov 13, 2017
Technical analysis is an effective tool to ascertain the market trends. There are three trends in a market namely minor trends which will last for 3 to 5 days, the intermediate trend will last for three weeks to 12 weeks and the third is the major trend which will last for a year and more.
The typical formation of a trend is that three or more minor trends will set an intermediate trend and three or more intermediate trends will set a major trend. Markets always move in a zig-zag movement. Higher tops and higher bottoms compared to the previous tops and bottoms depict bullish movements and lower tops and lower bottoms are signs of bearish movements.
Moving average of prices indicates the stability of the scrip’s price. 7 day, 30 days and 200-day moving averages thus are support levels in the short term, intermediate term and long term. If the 7 DMA is breached downwards it indicates that the prices will tend to come down in the short term and if the prices break out upwards above the 7 DMA indicates that the prices will tend to go up in a short term. Similar is the case in the intermediate term and long term when the 30 DMA or 200 DMA is breached downwards or break out occurs upward as the case may be.
Market breadth, the ratio of no: of shares advanced to the no: of shares declined is another indicator to ascertain the market mood. If the advances are more than the declines then it is a positive sign of strength and if it is the other way around it is a sign of weakness. We can plot the prices on daily charts and weekly charts which are available on so many websites. Along with the price charts, we can plot the 7-day moving averages and 30-day moving averages. When the 7day moving average crosses upwards the 30-day moving average, that is the ideal point of entry into a stock.
If we analyze the trend of most of the stocks with this methodology, the results seem to be very positive unless the price movements are in a trading range. Once the entry is made and so long as the short-term moving average does not breach downwards one can hold the stock. If the weekly charts follow the same trend that of the daily charts, it is confirmation that the trend will continue for a medium-term though there will be minor declines from time to time. It is always better to get out of the stock when the short term moving average crosses the 30-day moving average downwards.
Now the above trend indications can be confirmed by plotting the MACD graph. When the MACD crosses upwards the signal line, it gives a buy signal and if it crosses downwards the signal line it gives a sell signal. Thus MACD will give an advance signal of either buy or sell. However, it is safer to wait until such time the MACD crosses upwards/ downwards the equilibrium line to confirm the buy or sell.
Another tool to confirm the trend is the momentum indicators such as Rate of Change, Relative strength index etc. When ROC crosses upwards or downwards the equilibrium line it gives buy/sell signal respectively. Very high readings above the equilibrium line, either above or below indicate the stock is in either overbought or oversold position and a correction is imminent. However, sometimes there are occasions that the overbought/oversold positions continue for a longer duration and the price of the scrip will go up or down as the case may be during this period.
The interesting factor is that all these indicators such as moving average crossovers, MACD, ROC etc will give buy and sell signals at almost the same point of time which indicates the current trend either short term or medium term or long term as the case may be.
Volume analysis is also an important tool to analyze the price trends. Any price movement accompanied by good volumes is a reliable indicator that the price movements are genuine. Upward or downward movements of price with narrow volumes are highly deceptive and cannot be relied upon. The accumulation / Distribution (AD Chart) will indicate whether the stock is being accumulated or distributed and is a good tool for volume analysis.
Though there are a lot of technical analysis tools to analyze the market trend, I had taken the popular tools only. However a correct reading of these charts have to be done very carefully, otherwise, the results can be very disastrous.
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