Uptrend with overbought and bullish signal
As mentioned in the last article, the trend is your friend. To perform a technical analysis, the first step is to identify the trend of the financial instrument.
Based on the share price performance of the stock as shown in the chart below, it has been showing an uptrend since reaching bottom on December 2013.
The simplest definition of the uptrend of the stock is the share price performance is on a higher high and a higher low.
In addition to the trendline, the stock price also breaks above the resistance level (in blue colour) at about RM1.94, adding a bullish sign to the trend.
Next, let’s further include the two often used technical indicators, RSI and MACD.
RSI is an indicator used to identify overbought and oversold conditions. For the interpretation, when the indicator is reading below 30 level, it is considered oversold, while reading above 70 level is overbought.
From the chart, you will notice the RSI is currently reading at above 70 level, signalling the market is overbought. In a strong trend, the indicator may remain overbought for a prolonged period of time.
However, the RSI indicator has turned from its recent peak, and if it continues to fall below 70 level, the stock may enter a period of consolidation.
To buy or to sell? Let’s look at the second indicator: MACD. There are two points to look at it. First is the centreline crossover and the second is the signal line crossover.
Centreline crossover: when the MACD line rises above the zero line, it is a bullish signal. Otherwise, when the MACD line falls below the zero line, it is a bearish signal.
Signal crossover: when the MACD line crosses above the signal line, it is a bullish signal. Otherwise, when the MACD line crosses below the signal line, it is a bearish signal.
Based on the chart, the MACD line is above the zero line, and the MACD rises above the signal line. This suggests that the price of the stock is likely to experience upward momentum.
In short, the stock is clearly on the uptrend with the breakout of the resistance level. Based on the RSI indicator, the market is now in the overbought condition, and the MACD is still showing a bullish sign.
But also to lookout for the possibility of the RSI indicator turning down and falling below the 70 level. You may use other indicators to complement the investment decision.