Prognosticate the signals of stock prices using the MACD oscillator

Abstract

This study investigates the profitability of Moving average convergence divergence in Indian stock market. Utilizing relatively recent data from 2017 to 2019 on the selected top market capitalization stocks in Indian stock markets, the authors find that the MACD oscillator will generate reliable buy and sell signals which makes the investors to choose right stocks for their short term investments. Conclusion of this finding is that the investors can use MACD trading rules to earn abnormal profits on a consistent basis.

Key words: MACD, Technical Analysis, trading strategy, Indian stock markets

Introduction

Technical analysis is generally used to predict the future movements of the stock prices based on examination of the past prices. Technical analysis is most probably it can generate the reliable information to the investors for making profitable investments. Now a day, investors cannot make investments without proper information about the stocks and they always study the reports generated by technical analyst for making right investments. In a market, there is lot of technical tools available to generate the reliable information about the stock movements among those, the Moving averages convergence divergence (MACD) is one of the effective tool used to identify the right stocks to make investments for profitable returns. The MACD is effectively hybrid indicator, which can comprise both the elements of momentum and moving average analysis. The technical analyst uses two exponential moving averages namely 12 day EMA and 26 day EMA which make to identify the MACD and as well as the measure the momentum of the stock price. The MACD can be calculated by subtracting long exponential moving average (26 day EMA) from short exponential moving average (12 day EMA). The signal lines can generate by using 9 day exponential moving average of the MACD values. Here the technical analyst requires both the MACD line and signal line to measure and identify the signals of the stock. Generally the technical analyst uses the short moving averages for the more volatile stocks and long moving averages for less volatile stocks.

Literature Review

The MACD technical indicator first developed by Gerald Appel in the late 1970s, it is one of the most reliable and useful indicator for the investors for making right investments. Terence Tai-Leung Chong , Wing-Kam Ng and Venus Khim-Sen Liew (2014) the MACD rules are not robust to the choice of market. Before adopting these rules, it is advisable for traders and practitioners to at least ascertain the profitability of these rules in their markets using historical data. In addition, a simulation trading portfolio could be created in order to discover the full potential of these indicators under a real situation. Nguyen Hoang Hung (2016), the highest profitability is earned by the strategy – 4 i.e., Buy signal is generated when both MACD and signal line cross above the zero line, besides signal line is less than the MACD line. Sell signal is generated when both the signal line and MACD line cross below the zero line, besides signal line is greater than the MACD line. Safwan Mohd Nor and Guneratne Wickremasinghe (2014) the results reveal that in general, buy signals from trading using the MACD underperforms the naive buy and-hold strategy, although there is some support for it for short selling.

Research Methodology

The daily closing prices of the Reliance Industries ltd, Tata Consultancy Services ltd, HDFC Bank ltd, ITC ltd, Marut Suziki ltd, Larsen tourbo ltd and Nifty 50 index from April 2017 to March 2019 are obtained from NSE India. The above five stocks are top in terms of capitalization in india and also those are available in Nifty 50,which are selected from different sectors. Apart from stocks, we are also chosen Nifty. The MACD is calculated from the subtracting longer exponential moving average from the shorter exponential moving average, where EMA is calculated as follows:

Abbildung in dieser Leseprobe nicht enthalten

Trading Rules

Rule 1

Buy signal is generated when the MACD line above the zero line, it signals that the short term moving average (12 day EMA) is above the long term moving average (26 day EMA). It indicates that the momentum getting stronger. Therefore, a positive MACD suggests the current price has upward momentum. Sell signal is generated when the MACD line below the zero line, it signals that the short term moving average is below the long term moving average. It indicates that the current price is downside momentum.

Rule 2

Buy signal is generated when the MACD line cross above the signal line (nine day EMA of MACD values). Sell signal is generated when the MACD line cross below the signal line (nine day EMA of MACD values).

Rule 3

Buy signal is generated when both MACD and signal line cross above the zero line, besides signal line is less than the MACD line. Sell signal is generated when both the signal line and MACD line cross below the zero line, besides signal line is greater than the MACD line.

Rule 4

Buy signal is generated when both MACD and signal line cross the below the zero line, besides MACD is greater than the Signal line. Sell signal is generated when both MACD and signal line cross above the zero line, besides MACD line less than the Signal line.

Empirical Results

Figure 1 showing Reliance Industries limited MACD chart

Abbildung in dieser Leseprobe nicht enthalten

The reliance industries showing that during the period of October 2017 to august 2018, the MACD line keeps on moving above the signal line and also maintains above the zero line which indicates strong buy signal. In august 2018, the MACD line breaks below the signal line and at same time both MACD line and signal line breaks below zero line, besides signal line is greater than the MACD which indicates the strong sell signal for shorter period. At present, both MACD and signal line are above the zero line but MACD line just breaks and moves below the signal line which means sell signal is generated. So investors should be more cautious while making investments.

Figure 2 showing Tata Consultancy Services Limited MACD chart

Abbildung in dieser Leseprobe nicht enthalten

The TCS is one of the fundamentally strong script in Indian stock markets. The above TCS chart showing that during july 2017 to jan 2018, the MACD line was maintaining the above the Signal line which indicates buy signals. From feb 2019 to march 2019, both MACD line and signal line was above the zero line and MACD line was slightly greater than the signal line which indicates the stock was very stable and expecting move up in near future. The investors are advised to invest in this stock for short term investments.

[...]