Analyzing India

Special Note: Why This Humble Indicator Should Not Be Ignored


Moving Averages are one of the most simple and age-old tools within a technician's toolkit.

This humble indicator is nothing more than a smoothing tool, used for smoothing the price data to form a trend following indicator. It does not predict price direction, just the current trend and directional move of the price. Moving averages are lagging in nature and react late as they are based on past prices.

Despite being so unassuming, they form the basis of many other important indicators, such as Bollinger Bands, MACD, etc. The most commonly used variants of the Moving Averages are the Simple Moving Average and the Exponential Moving Average. One of the simplest uses of this indicator is to determine support and resistance price levels. If the price is above any Moving Average, that MA is expected to act as a support. On the other hand, if the price is ruling below any Moving Average, that MA is expected to act as a resistance point on the upside.

Most of the time, we tend to give lesser importance to this indicator, placing more emphasis on use of other oscillators and indicators and tend to ignore this. However, this humble indicator does not fail to give out the most important indications despite the whipsaws that it often sees given its lagging nature.

In the above chart, we have NIFTY 50 Index in three time-frames: Daily, Weekly and Monthly. Notice how, in each time frame, a different Moving Average has acted as a resistance even during such highly volatile market movements.

On the Daily Chart, the Index found resistance at the 100-day Simple Moving Average. On the weekly chart, it was the 200-week Simple Moving Average that proved to be an overhead resistance. Although the monthly bar for June is yet incomplete, as of today, the 50-month Simple Moving Average has acted as resistance.

This simple tool goes beyond this. The user-defined Moving Averages are also deployed as market breadth to determine the internal Market Strength and spot any anticipated directional move on the either side.

The use of a Moving Average on market breadth data to determine internal market strength will be discussed in our forthcoming webinar, titled "Understanding Market Breadth And Relative Strength Index For Profitable Trade Setups". Watch it this June 20, 2020.

The bottom line is that we should not ignore this humble indicator. The use of moving averages goes a long way in not only determining the trend, but also towards determining important resistance/supports and determining internal strength of the markets.

Milan Vaishnav, CMT, MSTA

Consulting Technical Analyst,

Milan Vaishnav
About the author: , CMT, MSTA is a qualified Independent Technical Research Analyst at his Research Firm, Gemstone Equity Research & Advisory Services in Vadodara, India. As a Consulting Technical Research Analyst and with his experience in the Indian Capital Markets of over 15 years, he has been delivering premium India-focused Independent Technical Research to the Clients. He presently contributes on a daily basis to ET Markets and The Economic Times of India. He also authors one of the India's most accurate "Daily / Weekly Market Outlook" -- A Daily / Weekly Newsletter,  currently in its 15th year of publication. Milan's primary responsibilities include consulting in Portfolio/Funds Management and Advisory Services. His work also involves advising these Clients with dynamic Investment and Trading Strategies across multiple asset-classes while keeping their activities aligned with the given mandate. Learn More
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