State of the Market|Reading the Psychology of the market

Moving averages (MA) are one of the most popular and often-used technical indicators. It is easy to calculate, visualize and it works wonders when stocks and market are making steep moves.

Example: When markets are in momentum phase (strong uptrend/downtrend) - then 20 period moving average works the best. In uptrend, it acts as support and in downtrend, it acts as resistance.

Let me give you couple of illustrations

Nifty weekly Chart = 20 week ma

Nifty has been in a very strong trend during last couple of years - 2008: downtrend; and in 2009 - uptrend. One line that has separated the two - 20 week ma. Have a look at the weekly chart below.

Source: ChartAlert [www.chartalert.com]

As you can see above, this week - Nifty has just been able to hold up 20 week ma. This is one of the reason - that next week - the level to watch is not the lows Nifty made last week but 20 week ma i.e. 4691. If next week, Nifty declines below 4691 again, [ok..give margin of error of 30 points i.e. 4660...] this market can go down to 200 dma, which means around 4000.

Bharti Telecom: Keep an eye on 20 day moving average

In case of Bharti Telecom, the fall has been so swift and sudden, that it will be more prudent to look at daily moving averages than weekly because it will take time for chart to catch up. So, let us look at the daily chart.

Source: ChartAlert [www.chartalert.com]

There are three things you can watch - first on left hand side - sharp recovery and how stock always traded above 20 dma; and then second - long sideways action - period when moving averages do not work; and then third - sudden momentum downtrend.

Just see how last week - Bharti stalled around 20 day ma. Ideally, this is the best place to go short on the stock from positional trend perspective with 3% stop loss above 20 day ma. The 20 dma as of now stands at 325.

Chalte Chalte

The idea is to share what one should watch out on charts when markets are making strong trending moves. I hope you found it useful. As always, please note this is not a trading recommendation.

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Disclaimer - The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers

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