Moving Average Market Level Indicator

Use this moving average calculator to get an approximate quantitative estimate of current market levels.  It calculates two moving averages  (over durations that can be varied by the user) of  30+ BSE and NSE market indices.

My aim in making this tool is to get an idea of long-term market trends following the method described by Jim Otar in his 'Hurricane Warning Chart'

http://www.retirementoptimizer.com/missworst.htm

The sheet will not allow you to exit the at the top and enter at the bottom.

DISCLAIMER :

  • Do not use this as a trading tool
  • Do not make investment decisions based on this data alone. This is a sheet made out of academic interest.
  • Recognise that understanding moving average movements will take time and you will need to develop your own interpretations.

A moving average or a simple moving average is a technical  analysis tool in which the actual index data is compared with its average taken over a period of time.

For example, a monthly moving average is one in which the monthly return is calculated, with the duration rolled over by one business day.

For example, if you have data between 1st Jan 1990 to present,

You would calculate the average index value between 1st Jan 1990  - 30th Jan 1990, then between 2nd Jan 1990 - 31st Jan 1990, then 3rd Jan 1990 - 1st Feb 1990 and so on.

The average data is plotted with the end-date of the interval (30th Jan, 31st Jan, 1st Feb ....).

In my investment strategy analysis of IDFC Dynamic Equity Fund, I had shown the 200 day daily moving average of the Nifty.

When the Nifty is above the 200-DMA, it represents an upward trend and when the Nifty is below the 200-DMA, it represents a downward trend. In a sideways market, the Nifty could repeatedly cross the DMA either way.

Jim Otar suggests the following with two DMAs:

1) 5-month DMA (blue line)

2) 12-month DMA (red line)

Bearish trend: If the blue line goes below the red line, when the red line is heading south (red arrows below)

Bullish trend: If the blue line goes above the red line, when the red line is heading north (green arrows below)

This is the result for the CNX Nifty

Moving-average

 

As mentioned above, moving averages do not allow you to catch market peaks and bottoms exactly but gives an overall trend, which I think will help limit portfolio volatility for the long-term investor at least from an emotional perspective.

Is this relevant for mutual fund investors? Should we not let the fund manager take calls for us?

Perhaps, yes. But fund managers may or may not be able to exit equity whenever they want. So I think it is up to the investor to take some tactical calls in moderation.

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22 thoughts on “Moving Average Market Level Indicator

  1. Jeethendra

    Moving average crossovers are one of the biggest strategy used in automated tradings. On the downside, It can also give lot of wrong signals when two close Moving averages are used for eg 20D and 30D moving averages. In one of the ted videos, I was seeing that number of scripts above 50DMA gives a predictable upside. if 25% of them are near 50DMA, its a good buy and if its 15% its a best time to buy stocks in the index itself. To my capability, I could not do it myself, i would happy if you can do the same and share your opinion on this strategy for CNX nifty or Sensex.

    Reply
  2. Jeethendra

    Moving average crossovers are one of the biggest strategy used in automated tradings. On the downside, It can also give lot of wrong signals when two close Moving averages are used for eg 20D and 30D moving averages. In one of the ted videos, I was seeing that number of scripts above 50DMA gives a predictable upside. if 25% of them are near 50DMA, its a good buy and if its 15% its a best time to buy stocks in the index itself. To my capability, I could not do it myself, i would happy if you can do the same and share your opinion on this strategy for CNX nifty or Sensex.

    Reply
  3. Kuntal

    Please do not take me otherwise. I think that this post is totally irrelevant to a long term investor. Such posts are completely opposite to what we all learn (and teach) in AIFW. I had warned u (some time back) not to post so frequently. After all we are all humans, tend to run out of ideas.
    Thanks,
    Kuntal.

    Reply
    1. pattu

      I don't write to be praised by others, nor do I expect everyone to agree with me. Before you conclude that this post is irrelevant to the long-term investor, suggest you read about tactical asset allocation strategies and how they help.

      Reply
  4. Kuntal

    Please do not take me otherwise. I think that this post is totally irrelevant to a long term investor. Such posts are completely opposite to what we all learn (and teach) in AIFW. I had warned u (some time back) not to post so frequently. After all we are all humans, tend to run out of ideas.
    Thanks,
    Kuntal.

    Reply
    1. pattu

      I don't write to be praised by others, nor do I expect everyone to agree with me. Before you conclude that this post is irrelevant to the long-term investor, suggest you read about tactical asset allocation strategies and how they help.

      Reply
  5. Jay Cobb

    Hi Pattu, this is a rather interesting post and promptly diverted my attention away from recent volatility! Looking at the current stage of the market with these MAs, it looks highly attractive to go with lumpsum. Can we take such a call with this indicator? In a bull market a lumpsum is always a better choice than monthly SIPs ..

    Reply
    1. Jeethendra

      As name says its an average for longer period, this does not indicate the continuity of trend, it indicates the past trend only and as Pattu sir rightly said, this should not be sole criteria to enter markets. This period is good for SIP than lumsum. Lumsum should be made when bears are dancing,valuations are attractive and not when bulls are running in highspeed. You might make x in short term but loose 10x if there is a correction.

      Reply
      1. Jay Cobb

        Right, I see Pattu sir has given the necessary disclaimers. However the MAs seem to provide good indicators on the trend when seen from a long term and also provide sell signals when there is bearishness. True, we may not be able to catch the peaks or bottoms but there is a chance to book some profits with these indicators and enter again when the bullish signs appear. So, why is this only an article of 'academic interest' and not taken as a tool for long term investment guidance?

        Even the 2007-08 madness where NIFTY fell around 60% this MA indicator gives an exit(or profit booking) trigger at around 20% losses from top. Going by the chart, if a lumpsum were to be invested around 2005 and comparing with SIPing all the way till 2007 tops, the lumpsum route would have saved more than the losses incurred in the eventual fall. Naturally on hindsight it looks nice and easy, I do understand the difficulty in sitting tight with lumpsum (or for that matter having a lumpsum in hand) invested with the market noise but my point is - the more number of criteria used to play the market the more chances of confusion. This MA tool seems to suggest a simple investment formula and ignore the short term market volatility, however my inexperience in markets does not give the necessary confidence either and hence the question in the first place 🙂

        Reply
  6. kaalaiyumkaradiyum

    Good to see you touching base on one of the technical indicators, the Moving Averages. You've even gone one step further to explain about the Moving Average Cross Overs (MACO). In my opinion, long term investors like you all should look into such technical aspects to book profits, partiall at the least, if not fully when the market gives signals to do so. The bearish signals may be taken into consideration to avoid portfolio erosion.

    Reply
  7. Kiran

    On average even MA based trading won't get you far from average gain over a long period, so this is good tool to analyse the market direction at a point in time but not as a deciding strategy for investments over the long run. If it was a tool to make gains as you say then everyone else would be on to it in no time making it self-defeating,

    Reply

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