Nifty’s 50 DMA holds the key for this rally to sustain

Riken Mehta

Follow me on Twitter @mehtariken 
The 50 Day Moving Average of Nifty holds the key for this rally to sustain in the near term. As it is evident from the chart the Nifty took support around its 50 DMA on three occasions in last two months and bounced back sharply. As the name implies, it is an average of a certain body of data. For example, if 50 day moving average (DMA) of closing prices is desired, the closing price for the last 50 trading days are added up and the total is divided by 50. The term moving is used because only the last 50 days closing prices are used for calculations.
The 50 DMA acts as a support in an uptrend and resistance in a downtrend. When the Nifty breaches 50 DMA on the upside in an ongoing trend with heavy volumes, then one can infer there is a reversal in trend and vice-versa. However, one must wait for the Nifty to close above or below 50 DMA for 3 to 5 trading sessions on a consistent basis before concluding trend reversal.
The moving average is a smoothing device. By averaging the price data a smoother line is produced making it much easier to view the underlying trend. Remember, moving average is a lagging indicator. What it means is that 20 Day Moving Average would hug the price action more closely than 200 Day Moving Average.
Depending on your time frame, a shorter, medium or longer term average can be used. A 50 day moving average would be more useful for short term trend while 200 DMA will prove effective for the longer term.
Types of Moving Average

Simple Moving Average
Simple Moving Average is widely used by most of the technical analysts. However, over the years this moving average has been criticized for assigning equal weight ages to all days. In a 20 day average, the last day receives the same weight age as the first day. This was taken care by Exponential Moving Average
Exponential Moving Average
Exponential Moving Average assigns a greater weight to the more recent data which is why it is called a weighted moving average. We will not brief the calculation. Technical software’s and charts makes it easy for you. All you have to do is select the number of days you want in the moving average: 20, 90, 200 etc.
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