Tuesday, 31 December 2013

Equity: Index: BSE Bankex

Bullish crossovers* in the 'Moving Averages' marked on the chart.

And it has dipped only slightly, and RSI* is already touching the oversold threshold(30%)!

*A bullish crossover signifies that more and more people are purchasing a stock or certain type of stock. Demand is exceeding supply. The effects show up in the stock's technicals, and may show up in the corresponding index, if people are purchasing many stocks that comprise the index. In the above case, we are looking at the composite of Indian bank stocks, the BANKEX Index. If the bullish crossover is accompanied by high volumes in sale-purchase, that's a pretty powerful indication that the rise will happen.

The bullish crossover occurs when a moving average with a smaller wavelength cuts a moving average with a longer wavelength from below.

*RSI indicates whether the stock or index has been oversold or overbought. If it goes above 70%, it is considered overbought and is likely to dip. If it goes below 30%, it is oversold and is likely to rise. Of course, we are talking probabilities here. In the above case, the index is technically in the oversold zone.

From Wikipedia:

Overbought and oversold conditions

Wilder thought that "failure swings" above 70 and below 30 on the RSI are strong indications of market reversals. For example, assume the RSI hits 76, pulls back to 72, then rises to 77. If it falls below 72, Wilder would consider this a "failure swing" above 70.

Finally, Wilder wrote that chart formations and areas of support and resistance could sometimes be more easily seen on the RSI chart as opposed to the price chart. The center line for the relative strength index is 50, which is often seen as both the support and resistance line for the indicator.

If the relative strength index is below 50, it generally means that the stock's losses are greater than the gains. When the relative strength index is above 50, it generally means that the gains are greater than the losses.
Uptrends and downtrends

In addition to Wilder's original theories of RSI interpretation, Andrew Cardwell has developed several new interpretations of RSI to help determine and confirm trend. First, Cardwell noticed that uptrends generally traded between RSI 40 and 80, while downtrends usually traded between RSI 60 and 20. Cardwell observed when securities change from uptrend to downtrend and vice versa, the RSI will undergo a "range shift."

To end...an example of how inaccurate 'Technical Analysis' can be, but then nobody says equity is easy..

UPDATE JAN 7, 2013

Earlier it was said that when a smaller moving average cuts a larger moving average from below, it is a bullish signal. However the strength of the bullish movement must be seen too, which can be seen in
the following graph dated Jan 7, 2013.

We see that the smaller moving averages are cutting the larger averages from below, but momentum is being lost. The pink bars and the falling height of the MACD histogram reveal the weak nature of this bullish movement. And in fact signify bearish sentiment. Refer translucent oval below.

"When the MACD histogram does not increase in height or begins to shrink, the market is slowing down and is a warning of a possible reversal." - Onlinetradingconcepts.

Footnote: "MACD Histogram Buy Signal: When the MACD histogram is below the zero line and begins to converge towards the zero line.-Onlinetradingconcepts.

Let us zoom out to a wider lens now...

This next graph plots the weekly values of the BANKEX from June 2012 to Jan 2014.

MACD wavelenght is 26 weeks and 12 weeks. The MACD histogram (pink and green bars) indicate the momentum of the trend they are vertically under.

MACD (blue line) is rising, which is a bullish sign. However we see that as it rises, the MACD histogram alternates between green and pink, in January.

Green bars in the MACD histogram mean that the current trend is gaining momentum.
Pink bars mean that the current trend is losing momentum.

We also see the 20 week and the 100 week moving averages rising. The 50 week moving average is falling however.

The 20 week moving average is approaching the longer wavelength averages (50,100) from below. It is possible that it will intersect both from below in the coming weeks.

The short term trend looks bearish though.

"..moving up but losing momentum.."

*MACD via Investopedia:

Just like stock prices, momentum will trend. Momentum changes precede stock price changes.

Nature of Momentum
Momentum in charting is similar to momentum in physics; if you throw a ball in the air, it will ascend at a slower and slower pace the higher it projects. After monitoring the changing momentum, a person can determine when the ball will stop climbing, change direction and descend.

Just like in physics, momentum changes occur before the price of a stock changes. These momentum changes can be easily observed using the MACD (mack-dee) indicator. (Buy high and sell higher.)

Update Jan 13, 2014.

Update Feb 04, 2014.

Around Jan 07, it was written that the Bankex is losing momentum.

Since Jan 10, Bankex RSI has been dragging along the 30% line.

All hell broke loose around Jan 15.

The Bankex has been trading below its 200 day EMA since 23rd Jan.

And its 20 day EMA cut its 100 day EMA from above, on 30 Jan.

So why is this happening?

There is bad news in the west, where an anti emerging market sentiment has built up in recent weeks.

Perhaps this sudden, almost freefall, will be curtailed, by views of people like Shawn Tully.

Back home in India, PSU Banks' earnings have dipped heavily. Which has made many investors, especially the short term ones, flee. See the RED band in the GMMA plot above. That represents the interest of short term traders.

So where will the Bankex go now?

Only time will tell which way the wind will blow...

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