Technical Indicators: Moving Averages, MACD, RSI, ADX & OBV – NISM Short Notes
This is Part 18 of the NISM Technical Analysis short notes series on PassNISM. Technical indicators are among the most heavily tested topics in the NISM Series VIII Equity Derivatives exam and the NISM Research Analyst certification.
In this post, we cover all major indicators — Moving Averages, MACD, RSI, ADX, RSC, and OBV — with clear explanations, key signals, and exam-ready revision points.
1. Moving Averages (MA)
A Moving Average is a smoothed, averaged version of price data over a defined number of periods. It removes short-term noise and reveals the underlying trend direction.
Key Concepts
- When the MA points upward, the trend is upward; when it points downward, the trend is down
- Moving averages are lagging indicators — they react to price rather than predict it, but they are excellent for identifying major trends
- When monthly, weekly, and daily MAs all move in the same direction, the probability of trend continuation is high
- Trading near a rising MA is a potential buy opportunity; trading near a falling MA is a potential sell signal
Fibonacci-Based EMA Combination
A widely used combination in technical analysis uses three Exponential Moving Averages (EMAs) based on Fibonacci numbers — the 13 EMA, 21 EMA, and 34 EMA:
- Uptrend condition: Price > 13 EMA > 21 EMA > 34 EMA (in a bull market, price typically finds support near the 34 EMA)
- Downtrend condition: Price < 13 EMA < 21 EMA < 34 EMA (price typically finds resistance near the 34 EMA)
- When all three EMAs are rising and spreading apart from each other, it signals a strong bull market
- When all three EMAs are falling and spreading apart, it signals strong selling pressure
2. Moving Average Convergence Divergence (MACD)
The MACD is a momentum indicator that shows shifts in market momentum and helps confirm whether a trend is likely to remain in force.
How MACD Is Constructed
- MACD Line (Fast line): 26-period EMA minus the 12-period EMA
- Signal Line (Slow line): 9-period EMA of the MACD line
- The MACD short-term average constantly converges toward and diverges away from the long-term average — hence the name
Featured Snippet Answer: The default MACD line is the difference between the 26-period EMA and the 12-period EMA. The signal (slow) line is the 9-period EMA of the MACD line.
MACD Buy and Sell Signals
| Signal | Condition |
|---|---|
| Buy Signal | Fast MACD crosses above the slow Signal line (both lines rising) |
| Buy Signal (continuation) | Fast MACD is above Signal line and makes a new upturn after nearly touching it |
| Sell Signal | Fast MACD crosses below the slow Signal line (both lines falling) |
| Bearish Divergence | Price makes a new high but MACD makes a lower high — upward momentum fading |
| Bullish Divergence | Price makes a new low but MACD makes a higher low — downward momentum fading |
Important MACD Rules for the NISM Exam
- The zero baseline provides the distinction between bull and bear markets — but a crossover of the zero line alone should NOT be used as a trade signal
- A steep MACD indicates powerful momentum; a shallow MACD indicates weak momentum
- When MACD makes a double top or double bottom, a trend reversal could be forming
- MACD shows changes in momentum, not necessarily changes in price — always use it with other tools
- Avoid trading stocks when the weekly or monthly MACD is clearly trending downward
- MACD can give false signals by reversing direction after a strong move — this does not mean a trend reversal; the stock may just be losing speed temporarily
3. Relative Strength Index (RSI)
The RSI is an oscillator that measures the speed and magnitude of a security's recent price changes to evaluate whether it is overbought or oversold. It is displayed on a scale from 0 to 100.
Key RSI Levels and Interpretations
| RSI Level | Interpretation |
|---|---|
| Above 70 | Overbought — potential reversal or pullback signal |
| Below 30 | Oversold — potential bounce or reversal signal |
| 44–45 (floor in bull market) | RSI rarely falls below this in a strong bull market |
| 50–55 (ceiling in bear market) | RSI rarely rises above this in a strong bear market |
RSI Divergence — A Critical Exam Topic
- Bullish Divergence: Price makes a new low but RSI does NOT make a new low → price is losing downward momentum → early buy signal
- Bearish Divergence: Price makes a new high but RSI does NOT make a new high → price is losing upward momentum → early sell signal
Exam Trap Warning: In a strongly trending market, RSI can remain overbought (above 70) or oversold (below 30) for extended periods without triggering a reversal. RSI is most effective in range-bound or sideways markets.
4. Average Directional Index (ADX)
The ADX measures the strength of a trend — not its direction. Whether the price is trending up or down, ADX quantifies how strong that trend is.
ADX Construction
- Calculated as a moving average of price range expansion over a default period of 14 bars
- Plotted as a single line ranging from 0 to 100
- Typically plotted alongside two Directional Moving Indicators: +DMI (positive) and -DMI (negative)
ADX Signal Interpretation
| ADX Value | Trend Strength |
|---|---|
| Below 25 | Weak trend or no trend — avoid directional trades |
| Above 25 and rising | Strong trend in place — look for directional entries |
ADX Buy and Sell Signals (with DMI)
- Buy signal: +DMI crosses above -DMI from below AND ADX is rising above 25
- Sell signal: +DMI crosses below -DMI from above AND ADX is rising above 25
- Important: Avoid DMI crossovers when ADX value is weak — the trade is unlikely to succeed
5. Relative Strength Comparatives (RSC)
The RSC (also called the Relative Strength Indicator or Price Relative Indicator) compares the performance of one security against another using a ratio chart.
What RSC Is Used For
- Gauging a stock's performance against a benchmark index like Nifty 50
- Evaluating a stock relative to its sector — is it outperforming or underperforming peers?
- Identifying stocks that hold up well during broad market declines or show weakness during market rallies
How to Interpret RSC Values
- RSC is normalised to 100 against the chosen benchmark (e.g., Nifty 50)
- RSC > 100: Stock is outperforming the benchmark
- RSC < 100: Stock is underperforming the benchmark
- Best buy signal: RSC has remained below 100 for a long period and then turns up and crosses above 100
- A 5–6-year time frame is recommended for a reliable RSC calculation
6. On Balance Volume (OBV)
OBV is a volume-based indicator that links volume flow to price direction. It is built on the principle that volume precedes price — changes in OBV often give advance warning of trend reversals.
How OBV Is Calculated
- If today's closing price is higher than yesterday's, today's volume is added to the cumulative OBV
- If today's closing price is lower than yesterday's, today's volume is subtracted from the cumulative OBV
OBV Buy and Sell Signals
| Signal | Condition |
|---|---|
| Buy | OBV line (OBV 1) crosses above its 20-period average (OBV 20) on the upside |
| Buy (fresh momentum) | OBV 1 is above OBV 20 and makes a new upturn |
| Sell | OBV 1 crosses below the falling OBV 20 on the downside |
| Very bullish | OBV 1 establishes an upward zigzag pattern above a steadily rising OBV 20 (weekly/monthly chart) |
| Very bearish | OBV 1 establishes a downward zigzag below a steadily falling OBV 20 (weekly/monthly chart) |
| Buying climax warning | OBV 1 bulges far above OBV 20 — suggests a potential short-term top |
Key OBV Principles
- If a price makes a new high but OBV does not confirm it, buying pressure may be fading
- A weakening OBV on long-term charts can give early warning of a trend reversal — smart money may be exiting at higher levels
- Weekly and daily OBV signals should confirm the monthly OBV before taking a trade
Quick Revision: Key Takeaways for NISM Exam
- Moving Averages: Lagging indicator; uptrend = Price > 13 EMA > 21 EMA > 34 EMA; downtrend = reverse.
- MACD: Fast line = 26 EMA minus 12 EMA; Slow line = 9 EMA of fast line. Divergence signals are critical.
- RSI: Oscillator from 0–100; overbought >70, oversold <30; bullish/bearish divergence are key signals.
- ADX: Measures trend strength only (not direction); <25 = weak/no trend; buy when +DMI crosses above -DMI with ADX rising.
- RSC: Compares stock to benchmark; >100 = outperforming; best buy when RSC crosses above 100 after a long period below it.
- OBV: Volume-based indicator; volume precedes price; OBV 1 crossing OBV 20 gives buy/sell signals.
Internal Links for Further Reading
- Part 17: Candlestick Patterns, Support & Resistance, Trendlines
- NISM Series 15 Research Analyst – Complete Study Guide
- NISM Free Mock Test – Practice Now
- NISM Research Analyst Certification – Study Notes
Sample Exam Questions (Practice)
Q1: The default MACD line is most likely the difference between:
a) 12-period EMA and 9-period EMA
b) 26-period EMA and 9-period EMA
c) 26-period EMA and 12-period EMA
d) 26-period EMA and 21-period EMA
Answer: c) 26-period EMA and 12-period EMA
Q2: Regarding RSI, which of the following is most likely true?
a) When the stock makes a new low and RSI doesn't, it is a bearish divergence
b) When the stock makes a new low and RSI doesn't, it is a bullish divergence
c) RSI is most effective in a strongly trending market
d) When the stock makes a new high and RSI doesn't, it is a bullish divergence
Answer: b) When the stock makes a new low and RSI doesn't, it is a bullish divergence
Q3: An ADX value below 25 most likely indicates:
a) A strong uptrend
b) A strong downtrend
c) A weak trend or no trend
d) A trend reversal is imminent
Answer: c) A weak trend or no trend
Next in this series: Full Revision Quiz: Technical Analysis for NISM Exam – 30 Practice Questions