SBI, Kotak Bank & IRCTC send out sell signal, select smallcaps look set to rally, suggests MACD

NEW DELHI: With Nifty50 staging a recovery on Tuesday after five days of fall, a host of smallcap stocks looked stronger on momentum indicator Moving Average Convergence Divergence or MACD.

The momentum indicator signalled bullish crossovers — a sign of bullish undertone — on 25 counters, hinting at possible upsides in the days ahead. The list included HBL Power Systems, Snowman Logistics, Zuari Agro Chemicals, Newgen Software Tech, Muthoot Finance and Dishman Carbogen. These stocks gained up to 14 per cent intraday so far.

Kitex Garments, Future Enterprises, Astec Lifesciences, Surya Roshni and East India are other stocks on the list.

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.

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The momentum indicator signalled bullish crossovers on 25 counters.

Data showed 38 stocks are showing bearish trends. They included SBI, Kotak Mahindra Bank, BHEL, NHPC, IndusInd Bank, IRCTC and Indiabulls Housing, among others.

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SBI, Kotak Mahindra Bank and IRCTC are on the list.

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- 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, the Nifty50 moved past the 14,750 level. Analysts are cautious though.

“Nifty has broken below the ’20-day EMA’ andany bounce towards 14,775-14,850 is likely to get sold into,” said Sameet Chavan of Angel Broking. Nagaraj Shetti of HDFC Securities sees immediate resistance for the index in the 14,800-14,850 range. The index hit a high of 14,854.50 on Tuesday, before paring some gains.

Understanding MACD


Whenever the MACD line has crossed the signal line, the stock has shown an uptrend.

A close look at the stock chart of Snowman Logistics shows whenever the MACD line has moved above the signal line, the stock has shown an uptrend, and vice versa.

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