NEW DELHI: As the benchmark equity indices witnessed profit taking in Tuesday’s trade from a six-month high, at least 17 stocks on NSE still showed strong bullish bias on the moving average convergence divergence, or MACD charts.
The momentum indicator signalled bullish crossovers — a sign of bullish undertone — on these counters, hinting at possible upsides in the days ahead. Many of these stocks have also been witnessing strong trading volumes of late, lending credence to the emerging trend.
The list included Axis Bank, Petronet LNG, Can Fin Homes and Aegis Logistics. Others included Dhanuka Agritech, Indo Count Industries, CEAT, Persistent, Systems, Religare Enterprises and Motilal Oswal Financial Securities.
The MACD is known for signalling trend reversals in traded securities or indices. It is the difference between the 26-day and 12-day exponential moving averages. A nine-day exponential moving average, called the ‘Signal Line’, is plotted on top of the MACD to indicate ‘buy’ or ‘sell’ opportunities.
When the MACD crosses above the Signal Line, it gives a bullish signal, indicating that the price of the security may see an upward movement and vice versa.
The MACD indicator should not be seen in isolation, as it may not be sufficient to take a trading call, just the way a fundamental analyst cannot give a ‘buy’ or ‘sell’ recommendation using a single valuation ratio.
This is because MACD is a trend-following indicator. Though traders can increase the sensitivity of MACD by using shorter moving averages for computing MACD (e.g. five-day and 12-day moving averages), the lag effect will still be there. Hence, traders should make use of other indicators such as Relative Strength Index (RSI), Bollinger Bands, Fibonacci Series, candlestick patterns and Stochastic to confirm an emerging trend.
On Tuesday, Nifty50 broke above the 11,500 mark to hit a six-month high of 11,525, only to erase the gains later. At 11.30 am, the NSE barometer traded 7.5 points lower at 11,458. The selling was seen as the index approached its upper end of the gap area placed at 11,536.
“A failure to cross this resistance may trigger profit booking, dragging the index lower to the 11,360 level. A sustained trade beyond the level would extend the gains to 11,565 and 11,620 levels,” said Aditya Agarwala of YES Securities.
Sameet Chavan of Angel Broking said when the market sees gravity-defying moves, nobody knows when and what’s going to trigger a correction. “Whenever it happens, it just comes as a surprise. We remain extremely sanguine but do not want to become complacent here and hence would advise against aggressive longs in the market,” he said.
A close look at the stock chart of Axis Bank shows whenever the MACD line has breached above the signal line, the stock has shown upward momentum and vice versa. On Tuesday, the scrip was trading 1.5 per cent higher at Rs 452.45 on NSE.