rahulg77 said:
Dear Traderji and Senior People,
I was seeing the charts of Riddhi Siddhi. it was on the same price levels on 13/02/06 and on 17/04/06 ir around 210-215. But if you see the MACD indicators they are totally different. On 13/02/06 they are very long and on the later date very small. what should we interpret from this. Does this mean something. Also the formation on the daily pattern. Someone told me it looks like a double top. But what i understood is that the bottom is too rounded for a double top.
According me and what also Amit said it might turn out to be a C&H but then only time will tell.
Pls your guidance on the same would be appreciated.
Rgds
Rahul
Had to delete this to rework the chart a bit, and reposting now.
Hi Rahul...I've taken theis query from another section to here as you've asked me to respond to it.
This is a rather long post so read it with time on hand.
You may also want to open the attached chart in another window to read along.
Ill go over the basics of MACD here, and then go over the chart of Riddhi Siddhi, to help clarify your issues.
Now, go back to what you've learnt about the nuts and bolts of MACD.
MACD is a trend following, lagging indicator.
The most popular settings are 26 day EMA, 12 day EMA, where MACD is the
difference between the short and the long periods.
Normally a 9-day EMA of MACD is plotted along side to act as a trigger line. A
bullish crossover occurs when MACD moves above its 9-day EMA and a
bearish crossover occurs when MACD moves below its 9-day EMA.
The key point to note is the
EMA of the closing price.
Now look at the daily chart of Riddhi Siddhi.
During early Nov to early Dec '05, before the breakout, there's an overlap of the two EMAs, meaning 12 and 26 EMAs are about the same.
In the same period, MACD crawls along the Zero Line. The reason of course is the balance of 26 EMA and 12 EMA is pretty much nil in this period.
Now go back in time to the small rally visible to the left of the chart between mid May to mid June 05.
As the rally peaks, correspondingly the MACD rises.
But as the price action turns flat and sideways, MACD begins to dip gradually.
Now look at the next rally during mid Aug to mid Sept.
Following the peak, the price takes a marked fall.
Correspondingly MACD falls off sharply too, and slips below the Zero Line.
So what does MACD do.
As it measures the difference between the two EMAs, a positive MACD indicates that the 12 EMA is above the 26 EMA, and vice versa when MACD is negative.
In the chart, in mid Aug, MACD slips below Zero, and correspondingly at that point the 12 EMA is 107, and 26 EMA is 110: The difference of the two is negative, below zero.
So far so good.
Now, there is another aspect of MACD besides being a trend following indicator.
It is indicative of the rate of change in momentum.
When MACD is positive and climbing, the gap between 12 EMA and 26 EMA is widening. This indicates that the rate of change of the faster EMA is higher than the rate of change for the slower EMA: Positive momentum is gaining.
Conversely, when MACD is negative and falling, the gap between the faster EMA and the slower EMA is again expanding, but in the negative. Rate of change of the slower EMA is higher: Now down momentum is gaining.
Zero Line crossovers occur when the faster EMA crosses the slower EMA in either direction.
To relate this to the chart (EMAs overlaid), notice that when the price is in sideways consolidation following the first rally, the faster EMA (blue line) is lying flatish, but the slower EMA (red line) is climbing steeply.
Here the rate of change is faster with the slower 26 EMA line. This is being reflected in the dipping MACD, where the signal line (red) is staying above the MACD, which is falling.
As the next rally starts, 12 EMA begins to climb faster than 26 EMA, widening the gap between the two in the positive. Momentum is faster in the positive, and again the same is being reflected in the climbing MACD.
During the overlapping of the two EMAs in the price chart, neither of the two has momentum, so there is no rate of change to deal with. Here MACD just snakes along the Zero Line.
Now to the rest of your query as to why MACD is different at two different points in time while the price is about the same.
Wellnotice how when the sharp rally starts at the end of Dec 05, the 12 EMA is fast leaving behind the 26 EMA. Its rising (or changing) at a much faster rate.
At the peak of the rally the gap between the two is quite large.
All this while, MACD is rising fast too, keeping well above the signal line.
Now the rally peaks on Feb 13, one of the dates youve have raised.
The following occurs between now and the next peak on April 17, your other date:
As the price peaks off and pulls back, the same action takes place as in the first rally to the left of the chart: Price pulls back, 26 EMA gains ground and narrows the gap with 12 EMA at a higher rate. By the time price hits a sideways move, MACD has dropped of noticeably. Compared to the previous rally, the rate of change is visibly higher in the 26 EMA, and hence the MACD has dipped steeper.
Then again there is a small rally to April 17.
On Feb 13 closing price is 205.95.
12 EMA is 181.78.
26 EMA is 163.54.
On April 17 closing price is 212.65.
12 EMA is 197.95.
26 EMA is 190.80.
So why is MACD different for the two?
Its higher on Feb 13 than it is on April 17.
Well to begin with we have seen that MACD, as a lagging indicator is also a momentum oscillator which oscillates above and below the Zero Line.
Typically, the slope of a momentum oscillator is directly proportionate to the velocity of the move. The distance traveled up or down by the momentum oscillator is proportionate to the magnitude of the move.
In our case with Riddhi Siddhi, the rally which peaks on Feb 13 is visibly sharp and steep, and of a significant magnitude. It begins around 105 and moves in a line to 206 without stopa hundred point move.
The second rally which peaks on April 17, comes off a rounded bottom, which we believe may be a C&H, remember. It comes off a low of around 175 to peak at 212, a mere 37 point move, and rounded at that.
So one reason is right here, why MACD didnt quite fire the same way the second time around. There was neither velocity, leading to a fast rate of change, nor the magnitude of the move, the second time.
Theres another way of looking at it.
Look at the closing data for Feb 13 and April 17.
On Feb 13, with a close at about 206, the 12 EMA at about 182, is about 24 points behind the closing price.
Compare this with the April 17 close of about 212.
Here the 12 EMA at about 198 is merely about 14 points behind the closing price.
So, clearly the close on Feb 13 is sharply above its 12 EMA, implying that the price while moving strongly, has dragged the 12 EMA hard behind it, but is still well in the lead.
This is not the case with April 17, where the price action is comparatively sluggish, with the 12 EMA narrowly trailing the closing price.
Yet another way of looking at it:
Look at the 26 EMAs for both the dates, in relation to how much they trail their 12 EMAs, to get a picture of how far ahead the faster EMAs are.
On Feb 13 this gap is of about 19 points.
On April 17 the gap is merely of around 7 points.
The rate of change in the 12 EMA versus 26 EMA is much faster on Feb 13, as compared to on April 17.
For all the above reasons, MACD on Feb 13 is much higher.
Thats pretty much it, Rahul.
I hope this clarifies your query.
