05 March 2011

Nifty : Death Cross?

There is a conventional knowledge of "golden cross" and "death cross" in technical analysis using moving averages. For starters a golden cross occurs when 50day moving average overtakes 200day moving average from below after a considerable rally from lows and a death cross occurs when 50day moving average overtakes the 200day from above.

The reason I am doing this post is because of Friday's action Nifty has done this "death cross", last one occurred in early 2008! As the chart above describes this crossovers from 1991, you see that since 2004 this is the 4th such event (including golden cross). Each time the effect has been significant.

So what should we infer from these numbers. What I feel is that there was no strong trend in the market before the 2004 crossover and Nifty just consolidated where up moves and down moves cancelled each other. It was a time of accumulation and base formation and as these should, took a lot of time. The period of 2004 to 2008 was the period where breakout and momentum was in play and the period when chasing momentum really made sense.

What I feel is that though there is no holy grail of trading and investing, this rule is still followed by a large herd of investors. Just because of its simplicity and significant ROI. Not only does this method identifies an entry point it also tells you a time to exit. And know what, it has signaled a time to exit for long term investors!


prabu said...

Looks like it.
In both EMA and DMA.
Unless its a take off on a touch and go.
Indicators in OB.

Its either going to be
Sell on Rise to 200ema & deathcross confirmation
Buy on break above 200ema & deathcross cancellation.
Thanks, good analysis.

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