Understanding Market Trend Based on Price-to-Moving Averages Action
We have often heard technical analysts, experts and media and publication houses use the term “bullish” and bearish” with reference to the equity markets. For the lay man, a bullish market is said to be good market or a market which is going up and vice versa in case for the bearish market. But ever wondered how these experts and other set of people mentioned above term the markets as “bullish” or “bearish”.
In technical analysis, there is a tool called as “simple moving averages” – it is one of the most common and easiest tools to understand. For averages in general is derived by taking the sum of any given asset and dividing it by the period (number of days) required. For e.g. to find the average of stock “A” for the last 20 days. We take the closing price for the last 20 trading sessions of A and divide it by 20 – this is also called simple moving average or daily moving average.
There are four significant moving averages which the technical analyst follow – 20-SMA or 20-DMA, 50-DMA, 100-DMA and 200-DMA. The 20-DMA is also referred to short-term moving average, and the 50-DMA as medium-term moving average and the 200-DMA as long-term moving average. The term “bullish” and “bearish” are used with reference to these moving averages. For e.g., is a stock is above the 200-DMA, then the stock is said to be bullish in the long-term. Similarly, in case, the stock is above the 20-DMA, but below 50-DMA, then the stock is said to be bullish in the short-term, but bearish in the medium-term.
Apart from the price-to-moving averages action, the moving averages also depicts a trend. For e.g., if the short-term moving average is above the medium-term and long-term moving average, then the trend is said to be bullish. Similarly in case, where the short-term moving average is above the medium-term moving average, but below the long-term moving average. The trend is said to be positive in the short-term, but negative in the long-term. Technical analyst and experts used various combinations and computations to draw conclusions for their analysis.
Let’s take a live example – the Nifty. As per the price-to-moving averages action, the Nifty is bullish in the short-term, medium-term and long-term, as the NSE index is firmly above all three key moving averages. Similarly, the short-term moving average is above the medium-term and long-term moving average – which makes the current trend fairly strong and is also called “bullish”. Please note: the red line is 20-DMA, blue line if 50-DMA and green line is 200-DMA.
In the same chart, if you look at the December period, we had witnessed a similar development, wherein the Nifty was seen trading firmly above all the key moving averages. Following which, in the ensuing correction the NSE index found support around the 50-DMA and 200-DMA. However, later-on once the short-term moving average of the Nifty slipped below the 50-DMA and 200-DMA, we witnessed a fresh fall in the markets – which was called as the bearish phase.