Moving Averages and MACD for NEPSE Investors

Moving averages are the most widely used tool in technical analysis, and MACD — one of the most popular indicators — is built from them. Both are simple once you see how they are made. This guide explains them with NEPSE in mind, including three traps that catch people on Nepali charts in particular.

What a moving average is

A moving average smooths a price chart by averaging the closing prices of the last several sessions, recalculated every day as the window moves forward.

• A simple moving average (SMA) gives every session in the window equal weight. The 20-day SMA is the average of the last 20 closing prices.
• An exponential moving average (EMA) gives more weight to recent sessions, so it reacts faster to a change in direction, at the cost of reacting to more noise.

Neither predicts anything. A moving average describes where the price has been on average — it shows the trend more clearly than the day-to-day zigzag.

The common lengths

NEPSE trades roughly 230 sessions a year once weekends and holidays are taken out, so:

• 20-day — about a month of trading. Short-term trend.
• 50-day — about a quarter. Medium-term trend.
• 200-day — most of a year. The long-term trend many investors watch.

How people read them

• Price above or below the average. A price above a rising 200-day average is in a long-term uptrend; below a falling one, a downtrend.
• The slope. A flat average means no trend — the price is drifting sideways.
• Crossovers. When the 50-day crosses above the 200-day it is called a "golden cross", and the opposite a "death cross". They mark a change in trend after it has already happened.
• Moving averages as support or resistance. In a trend, pullbacks often pause near a widely watched average, partly because so many people watch it.

The weakness is built in: averages lag. They confirm a trend late, and in a sideways market they produce one false crossover after another — the "whipsaw" that costs trend-followers money in range-bound periods, which NEPSE has plenty of.

MACD, step by step

MACD (Moving Average Convergence Divergence) turns the relationship between two EMAs into a single line you can read:

1. The MACD line is the 12-day EMA minus the 26-day EMA. It is positive when the short-term average is above the long-term one — recent momentum is up.
2. The signal line is the 9-day EMA of the MACD line.
3. The histogram is the MACD line minus the signal line, drawn as bars. Growing bars mean momentum is strengthening; shrinking bars mean it is fading.

Common readings: the MACD line crossing above the signal line is read as momentum turning up; crossing the zero line means the 12-day average has moved above or below the 26-day; and a divergence — price making a new high while MACD makes a lower one — is read as momentum weakening. Like the averages it is made from, MACD lags, and gives many false signals in sideways markets.

Three NEPSE-specific traps

1. Bonus and right issues

On an unadjusted chart, a 20% bonus share looks like a 17% overnight crash, and a 1:1 right issue at Rs 100 can look like a 40% fall. Every moving average spanning that date is dragged down by a fall that never happened, and a false "death cross" can appear out of nowhere. Always read averages on a chart adjusted for bonus and right issues. NepseIQ's charts are adjusted, and every indicator is computed on the full adjusted history before the visible window is shown — so an average at the left edge of your screen is the same as it would be if you scrolled further back.

2. Thinly traded shares

A share that trades on only some days has gaps in its history, and a 20-day average of a stock that traded 8 times in a month describes very little. Check the volume before trusting any indicator on a quiet stock.

3. The 10% daily limit

NEPSE limits how far a share can move in one session. A share with strong news can rise by the limit for several days running, and averages lag even further behind such runs. Crossovers during them say more about the limit than about the trend.

Do they work?

As descriptions of trend, yes — that is what they are for. As predictions, on their own, no. In NepseIQ's own tests on 15 years of NEPSE prices, moving averages, MACD and many other indicators together did not call the next week's direction better than chance (see what 15 years of data say). Use them to understand the trend you are in, alongside support and resistance and RSI, not as a signal to buy or sell by themselves.

Where to find them

On NepseIQ's chart, the Indicators menu adds SMA, EMA and MACD among others, with their settings shown. Each stock's Technical tab also says in plain words where the price sits against its 20 and 50-day averages, and whether the shorter one is above the longer.

Moving averages and MACD describe the trend; they do not forecast it. Read them on adjusted prices, check that the stock actually trades, and expect them to lag.