Sunday, January 27, 2008


Analysis of five automobile scrips using MA, EMA, ROC, RSI, and MACD revealed that investor with long term motive and buy & hold strategy can make more profits in the long run.

In the simple moving average chart, the price line touched the simple moving average line and turned back many times. The average line acts as a support line when the prices are above the average line and as a resistance line when the prices are below the average line. Hence long term/short term investors can use the different support lines and take decisions on purchase of shares just above the support line. If the price gone further below the support line, to avoid huge loss a stop loss should be applied at the breakout point, because next support line may be far below.

Investors who want to sell the shares should sell it when the scrip reaches the resistance line. But the long term investors need not sell their stocks when the price reaches a resistance level. Because after some turn backs the price will break that resistance level and easily goes up to the next resistance level.

Within a short period Signals in the daily charts turn direction. Hence it is suitable only for short term investors. Weekly charts are suitable for medium term investors as more signals last for months. Monthly charts are more useful for long term investors. Monthly charts will not consider minor variations; it gives signal when major support/resistance is broken.

Moving averages are lagers, hence when the MA is crossed over buy the price line it is a signal for trend reversal. An investor should act at that moment. Otherwise he may incur losses.

EMA charts also give indication similar to SMA charts. 48 day EMA gives clear signals for short/medium term investors, if it is used along with price line .12 month EMA chart is useful for long term investors as one of the signal (given in the EMA chart no: ) lasts for about 3 years, even though there are minor corrections in between.

Buying and selling of the scrips can be done, measuring the ROC of the scrip. Normally ROC based buy&sell boundaries are equidistant from zero line (eg.-0.05 and 0.05). But in bull run these boundaries will not give optimum returns. A test with past values found that higher values for both buy and sell boundaries give better returns. A buy boundary around -0.01 and a sell boundary around 0.07 gives a better result in a bull run. These boundaries may also vary in the case of another scrip. But a study of the past values of ROC can help an investor to fix a suitable buy and sell limits for ROC. The returns in ‘long-cash’ and ‘buy & hold’ strategies will not be the same. In bull run ‘buy & hold’ gives more return. In other cases ‘long-cash’ is good. An investor should aware of this for better returns for his investments.

The price of Tata motors from 1/1/2002 to 31/12/2004 is taken for RSI analysis. The price of the scrip jumped from 129 to 424 in between the first buy signal and the last sell signal. The growth is about 330%.In this case an investor with a ‘buy & hold’ strategy will get 230% return. Adopting ‘long-cash’ strategy will fetch far less. To get 190% (maximum) growth in the ‘long-cash’ strategy; buy ‘below 60’ and sell ‘above 70’ should be the range of RSI, which is very narrow and practically difficult. Also it is useful for an investor with high risk appetite. Investors who prefer low risk should wait till the value of RSI comes near 30 and swings above showing bullish sign. This can be assured with a significant rise in volume. i.e., investors are demanding more shares, causing rise in the price of the scrip. RSI analysis shows that in a booming market ‘buy & hold’ strategy is good for long term. The RSI gives an early warning for entry or exit for short or medium term investors.

MACD line normally crosses over zero line. But in booming market it will not come to south. If MACD is oscillating in the positive territory the scrip is in the bullish trend. In such cases the cross over of ‘MACD line’ on ‘line of MA of MACD’ will be useful, though they are less reliable because moving Average Crossovers are the most common signals.All the signala can be generated using computer.

To conclude, though the mathematical indicators used in this study are very powerful and useful, practical fixing of accurate triggers to time the market is a tough task. There are many factors, which though not related to past data or the fundamentals of the scrip, play an important role in the daily market. The influence of the world market, currency exchange rate, declarations of interest rates in different countries, weekly inflation, the decision of an FII to invest in one scrip etc are beyond the influence of past data. Hence an investor should not depend on one indicator alone. He should combine different tools for better results. Any how past data will not be a 100% representation of the present price. A vigilant and highly informed investor can make good profits if he uses the above tools for decision making.