Stock market –

Technical indicators
 Types of technical indicators
Trend indicators

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These measure the direction of a market trend—up trend, down trend and sideways trend.

Momentum indicators

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These measure the speed of a trend and help to identify trend reversals. They are used only as warning signals—just like the reducing
speed of a car may not end up in it stopping altogether, all reductions in market momentum don’t end up in a trend reversal.

Volatility indicators

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These indicate how uncertain a market is. Volatility is usually measured in terms of standard
deviation.
 I. Trend Line
• Type – trend indicator

• Computation - Connecting three rising price bottoms makes an uptrend; three falling

tops make a downtrend.

• What does it signal?

Stock price above an uptrend line means market is bullish on the stock. Price below

a downtrend line shows market is bearish.

• Takeaway - Buy when price moves towards long-term moving average from the top,

but sell if it goes below the uptrend line. Sell when price moves towards the

downtrend line from the bottom, but buy if it goes above the downtrend line.
Longer the trend line, the stronger is the trend.
 II. Simple Moving Average
• Type – trend indicator

• Computation - A simple average of the closing stock prices for selected time period. Short-

term traders usually use the 10-day prices to calculate the simple moving average (SMA),

medium- to long-term investors use 100-day or 200-day moving average.

• What does it signal?

If the price remains above long-term indicators such as 100- or 200-day SMA, market is

considered to be bullish on the stock.

• Takeaway - Buy when prices approach long-term moving average from the top but sell

when they fall below the longterm moving averages. Sell when the prices approach the long-

term moving average from the bottom but buy if they go beyond the long-term moving

average.
Now the index is struggling to cross 100-day SMA.
 III. Rate of Change
• Type – momentum indicator

• Computation -Percentage change in prices of two selected time periods. Most traders

use 14-day Rate of Change (ROC).

• What does it signal?

• Positive ROC value means prices are rising; negative ROC value means prices are

falling.

• Takeaway -Turnaround in ROC indicates a possible turnaround in price. Divergences

—price going up but not the ROC—is a good warning for a trend reversal.
Divergence between price and ROC hints at a trend reversal
 IV. Relative Strength Index
• Type – momentum indicator

• Computation - It is based on the average price increase during a period of rising

prices and average price fall during a period of falling stock prices. Relative

Strength Index (RSI) is plotted between 0 and 100.

• What does it signal?

Usually, the market is treated as overbought when RSI goes above 70 (80 for highly

volatile stocks) and oversold when it hits 30—20 for highly volatile stocks.

• Takeaway - RSI entering overbought and oversold zones should be treated only as

warnings. Sell when RSI goes below 70 twice consecutively. Buy if it goes above

30 twice consecutively.
RSI indicates that the Nifty is neither overbought nor oversold.
V. Moving Average Convergence Divergence

• Type – trend and momentum indicator

• Computation - The difference between 12 and 26-day moving averages.

• What does it signal?

Rising Moving Average Convergence Divergence (MACD) indicates an

upward price trend and falling MACD indicates a downward price trend.
• Takeaway - Usually, nine-day moving average of MACD is used for buy
and sell calls. Buy when MACD goes above the nine-day moving average
of MACD, sell when MACD go below the nineday moving average.
Falling MACD indicates a downward price trend.
 VI. Bollinger Bands
• Type – Trend, volatility and momentum indicator.

• Computation - They comprise three lines: A 20-day moving average, an upper

band and lower band—the upper and lower bands are plotted as two standard

deviations from the moving average.

• What does it signal?

The moving average shows the trend, the gap between upper and lower band shows

volatility in the counter.

• Takeaway -Prices surging to the upper band during high volatility show that the

counter is overbought. Prices falling to the lower band during high volatility show

that the counter is oversold.

The Nifty is at the 20-day moving average.
 VII. Fibonacci Retracements
• Type – Trend indicator.

• Computation - These percentages—23.6%, 38.2% and 61.8%—are

golden ratios based on the Fibonacci number series.
• What does it signal?

After a rally or a fall, stocks usually retrace their prices to an extent before
the next trend begins. Traders believe these retracements occur close to the
golden ratios.
• Takeaway - Retracement happening at 23.6% shows the trend (upward or
downward retracement) is very strong. Retracement usually ends at 38.2%.
The trend considered over, if the retracement goes beyond 61.8%.
If the trend is strong, retracement happens at 23.6%.