Moving Average (MA) is a very popular indicator to gauge the trend of stock market. Conventionally, 200-days MA is the barometer of portfolio managers to rebalance their position. This week, we are going to demonstrate another usage of MA, as a momentum indicator.
In a previous article, we demonstrated the usage of Fourier Transform to determine the market cycle of KLCI (Read more here). From a medium-term perspective, 61 days is a significant market cycle. As such, a 61-day simple moving average is plotted on top of KLCI data in the following chart. The black curve is the daily closing price of KLCI while the blue curve is the 61-day MA.
The Over Sold indicator is computed by studying the gap between 61-day MA and daily closing price. If the immediate gap is larger than 70% of the normalized gap over the observation period, it will be classified as Over Sold, which is plotted as red in the chart. The Over Sold indicator did detect several reversal points over the observed period.
