Simple Moving Average & Market Trends
A moving average can be utilised to determine the trends. For instance, if the moving average is rising, then the trend is considered up. On the other hand, if the moving average is falling, the trend is considered to be down.
However, the following method is also useful to determine trend in easier way and it can be clubbed with rising and falling SMA technique.
Moving Average Crossover
When the shorter moving average crosses above the long term moving average, it shows the trend is shifting up and creates a buy signal.
When shorter moving average crosses below the long term moving average, it shows the trend is shifting down and creates a sell signal.
The simplicity of this indicator makes it popular among the traders. Moving Average does not work well in choppy or sideways market condition and it is advisable to not to use shorter or medium-term MAs during that period.
Why Buy Bharat Heavy Electricals?
Positive short-term and mid-term trend with Moving Average Crossover (50*200) on the lower time frame in BHEL suggest bullish momentum ahead; however strong rally will unfold on a breach of crucial resistance standing around Rs 53 mark.
BHEL has also given a descending trend line breakout and it has retraced back to touch the trend line, looking at flip property, this trend line should provide strong support and prices should trade higher towards previous swing high placed around Rs 57.50 levels.
Figure.1. MA Crossover and Buy signal on BHEL Buy Signal:Profit Booking:
- Short term moving average 50 SMA defines mid-term trend which is rising and placed around 49 marks.
- Long term moving average of 200 SMA defines the long-term trend and it is rising and placed around 48.
- Recent close prices (51) are trading above the short term moving average and long term moving average.
- The occurrence of MA Crossover of 50 and 200 SMA around 48 shows strong strength and bullish momentum in progress.
- Major resistance breakout will come only above 53 levels, which can push prices higher towards previous swing high.
Whenever price candle will be near previous swing high which is near Rs 57.60 levels and higher towards Rs 61 levels.
Entire bullish view negates on breaching of low of swing bottom candle and one should exit from a long position. In the case of BHEL, it is placed around 46.50 levels.
We recommend buying Bharat Heavy Electricals around Rs 50-51 levels with a stop loss of Rs 46.50 for higher targets of Rs 57.50 and Rs 61 as indicated in the above chart.
The author is Head – Technical & Derivative Research, Narnolia Financial Advisors
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