Nifty: Key breadth indicator hinting at possible higher levels for Nifty50

Among the various tools and indicators that technical analysts use to analyse price charts, this Breadth Indicator measures the strength of the trend in the underlying security or index. In the event of any uptrend in any security or the index, it becomes imperative to know if the uptrend has a wider participation of stocks or if it is being driven by a select few stocks.

For any uptrend to sustain and be healthy, it has to have a wider participation of as many stocks as possible.

Cumulative Advance-Decline Line or AD Line is such a Breadth Indicator. It is calculated by deducting the net declining stocks from the net advancing stocks. Net advances is positive when advances exceed declines, and negative when declines exceed advances. The AD Line is a cumulative measure of net advances; it signals a rising trend when net advance is positive and a falling trend when it is negative. The AD Line is used to measure the strength in the move; it has to confirm and move in tandem with Nifty.

The most important use of this AD Line Breadth Indicator is to examine any divergence; bullish or bearish, against the index. In the current case, this Breadth Indicator is shown a bullish divergence against Nity50 Index.

The one seen above is the Nifty50 daily chart. To keep it clutter-free, it is plotted with the 50-DMA, which is currently placed at 14,659.

Observe the extended trend line; it is drawn from the low point of last year and is extended until today. The 50-DMA is almost acting as a proxy trend line on the lower side of the channel.

Below that is the cumulative Advance-Decline Line of Nifty50. It has shown a bullish divergence, as the AD Line has move out of a pattern and formed a new high ahead of Nifty. While Nifty is away from its high point, the AD Line hovers around it. It hints at possible higher levels for Nifty and increased likelihood of the index attempting to retest its previous high point.

The RSI, which is a lead indicator, can also be subjected to pattern analysis just like the price. It has formed a neutral Symmetrical Triangle formation. Any move out of this pattern is also set to offer us advance cues on the likely movement in the Nifty over the coming days.

As of now, the AD Line is clearly hinting at possible higher levels for Nifty in the immediate short term.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)