Technical Analysis – 3 (Very Important)

Continuing from yesterday’s posting, Trend Reversals, today I am going to post the most practically used tool. That is Moving Average. Famous Technical Analyst, Ashwini Gujral uses these averages superbly for predicting the market moves. Now I am not going to discus about what is moving average, and its definitions, but I will directly come to the point, how in market analysis these moving averages are used. So today’s topic is Major Uses of Moving Averages.

Moving averages are used to identify current trends and trend reversals as well as to set up support and resistance levels.

Moving averages can be used to quickly identify whether a security is moving in an uptrend or a downtrend depending on the direction of the moving average. As you can see in Figure, when a moving average is heading upward and the price is above it, the security is in an uptrend. Conversely, a downward sloping moving average with the price below can be used to signal a downtrend.

Here you can see that moving average can be used for both the trends, up as well as down trend to indicate. As you find out in graph, the moving average is heading upward direction from June 2007 to Jan 2008. In this period, price of the security almost all the time is above the moving average. This shows bull trend. And when moving average starts sloping down from January 10 onwards, price of the script is below the moving average. This indicates trend reversal and bear trend.

Another method of determining momentum is to look at the order of a pair of moving averages. When a short-term average is above a longer-term average, the trend is up. On the other hand, a long-term average above a shorter-term average signals a downward movement in the trend.

The 15-day moving average crosses above the 50-day moving average at 1600 levels. It is a positive sign that the price will start to increase. Also here you can observe that the short moving average is above the long term moving average.

And again signal reverses the trend when one moving average crosses over another at 2300 levels. At this point Bull Run ends and Bear Run starts. And exactly from that point onwards The State Bank of India started falling.

Another major way moving averages are used is to identify support and resistance levels. It is common to see a stock that has been falling, stops its decline and reverse direction once it hits the support of a major moving average. A move through a major moving average is often used as a signal by technical traders that the trend is reversing.

SMA (60) is acting as support in October and resistance in February. In total indicating both the trends upward and downward trends.

Keep reading…

Keep investing…