Key sectors that are showing strength on charts and can rally from here on

An Axis Securities note provides a sector-wise distribution of stocks trading above key Exponential Moving Averages. EMAs give more weight to recent prices, making them more responsive to new triggers

An analysis of sectoral health basis on the moving averages by Axis Securities suggests that FMCG, Finance, Private Banks and Media are favourably placed as against others. The analysis is based on sector-wise distribution of stocks that are trading above specific Exponential Moving Averages (EMAs).  The report lays emphasis on the per centage of stocks trading above the key EMAs as a trend indicator for that particular sector. Before we proceed with the report output, let's first understand what EMAs are and their significance.  What are Exponential Moving Averages?  An Exponential Moving Average (EMA) is a type of moving average that gives higher weightage to recent price points as against the older prices, unlike a Simple Moving Average (SMA) which assigns an equal weight to all data points within the specified period.  The fact that EMA places more weight to the latest price action, makes it more responsive to price changes when compared to a SMA.    The EMA is calculated taking into consideration the previous day's SMA alongside the multiplier effect. The multiplier is derived by dividing 2 by the number of days + 1. For e.g. the formula calculating the multiplier for 10-EMA is (2 divided by (10+1)) - thus 18.8 per cent weightage is applied to the recent data i.e. that 10th trading day, and the rest in a diminishing order is applied to the preceding 9 data points.  What is the importance of EMAs?  Like SMA, EMA too is used as a technical indicator in stock market trading to generate 'Buy' and 'Sell' signals based on moving average crossovers and divergences.  In a rising market, EMAs tend to display an uptrend, while in case of a falling market it’s vice versa. Further, stocks trading above specific EMAs are considered bullish, while stocks trading below the specific EMAs are considered bearish.    That apart, crossovers of shorter-term EMAs over the longer-term EMAs are also considered as a positive sign for the underlying stock or index.  Key takeaways from the Axis Securities report  The Axis Securities report highlights the number of stocks within a specific sector trading above the key EMAs. The report has taken into consideration the 5-, 20-, 50-, 100- and 200-EMAs. The overall per centage of stocks closer to 100 above a particular EMA implies that a higher number of stocks are trading above that specific EMA, and a number closer to 0 implies that the least number of stocks are holding above that EMA. 

 

 

  The chart above shows that as many as 93 per cent of FMCG stocks are trading above the 5- and 20-EMAs; thus implying a likely favourable bias in the near-term. The long-term outlook also seems favourable compared to any other sectors, with indicators 73 per cent and 67 per cent of FMCG stocks trading above the respective 100- and 200-EMAs.  Among others, bank - particularly private bank stocks are seen favourably placed on the short-to-medium term EMAs; while media looks exciting in the very short-term, but not so good over the medium-to-long term periods.  For now, PSU Banks and IT seem to be the least favoured stocks sectorally, with just 25 per cent and 20 per cent of the stocks trading above the 5-EMAs.