NEW DELHI: Back-to-back falls in domestic stocks over the past four sessions have sent a number of stocks tumbling. Many of these, 112 precisely, have sent out bearish signals on the moving average convergence divergence, or MACD, charts.

The momentum indicator signalled bearish crossovers — a sign of bearish undertone — on these counters, hinting at possible downsides in the days ahead.

Many of these stocks are among the top 100 companies in terms of market capitalisation. They included Ashok Leyland, Tech Mahindra, M&M, Grasim Industries, Hero MotoCorp, Berger Paints and Dabur India.

Cement stocks India Cements and The Ramco Cements, pharma stocks Marksans Pharma and Strides Pharma, exchanges BSE and MCX and Tata group stocks such as Voltas and Tata Elxsi are part of this list.

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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.

Data showed just two stocks are showing bullish trends on the MACD chart: Vaibhav Global and Pearl Polymers.

Analysts, however, warn that the MACD indicator should not be seen in isolation, as it may not be sufficient to take a trading call based on this, 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 the MACD by using shorter moving averages for computing MACD (e.g. 5-day and 12-day moving averages), the lag effect will still be there. Hence, one 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 slipped below its recent swing low of 11,185, which analysts said was a crucial support for the index.

After 11,185, the 11,110 level is the intraday support for Nifty50, said Samit Chavan of Angel Broking.

“It would be followed by the short-term support at the ‘89-day EMA’ around 10,940. On the flip side, the 11,335 and 11,450 levels are now emerging as immediate points of resistance,” Chavan said.

Aditya Agarwala of YES Securities said a sustained trade below the 11,270 level will drag Nifty lower to 11,150-11,100 levels while a trade above 11,300 level may trigger a short-covering rally to the 11,350-11,400 zone.

Understanding MACD

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A close look at the stock chart of Hero MotoCorp shows whenever the MACD line has breached below the signal line, the stock has shown downward momentum and vice versa. On Tuesday, the scrip was trading 2.92 per cent lower at Rs 2,966 on NSE.

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