The Anatomy of a NIFTY Top

In this post, I’m going to explore something that has always fascinated me; how do market tops happen? Are there data patterns (beyond candlestick patterns) which can be utilized to identify those tops in real-time? So, let’s see if some of those questions can be answered in this post.

For the sake of lucidity, I’m going to split the analysis into a few parts.

Let’s first define what a top means (for purposes of this post)

  • Price Action that leads to a multi-month (>=3) correction
  • Test of the +/- 0.5 SD Bollinger Band (i.e. BB with 0.5SD width and 20MMA)

The Nifty Infancy i.e. 1990 – 1995

During this period, there were 2 market tops which led to multi-month corrections. These tops happened in April 1992 and September 1994

  • Both tops were made during months with red candles and the month range was 16.8% and 6.8% <Interesting Symmetry there!>
  • The first was a blow-out top and the second was a measured top.
  • The second top was 8.2% higher than the first top.
  • Due to the Infancy, both were All-Time High tops.
  • RSI high before either of the two tops was 90 and 75.

INFANCY_01

NIFTY Starting School: 1996 – 2003

These years could also be characterized as the consolidation years. NIFTY made 4 market tops during this period, but it wasn’t until the 4th market top that it crossed the All-time high created during the Infancy years. The four tops were made in June 1996, August 1997, April 1998 and February 2000.

  • The ATH top (Feb. 2000) was made ~ 32% above the previous ATH (Sept. 1994)
  • All except August 1997 top were made in months with Green candles.
  • The monthly range, for months where tops were made, were 9.4%, 15.3%, 10.6% and 16.3%
  • Only the final top was an ATH.
  • All consolidation tops (first three) happened with RSI highs between 55 – 60 and the final ATH top happened with an RSI high of 72.

NIFTY_02

NIFTY’s Wild Years: 2003 – 2009

This period saw the most one-sided rally that NIFTY has ever seen followed by a stunning fall. This rally enticed and introduced many people to the equity markets (including me) and then us newbies saw our portfolios getting halved over the period of a few months. Probably the best description of these wild years can only come from a Charles Dickens epic – “It was the best of times and the worst of times …..”.

During this period, NIFTY made three tops (as per my definition) in January 2004, May 2006 and finally in January 2008.

  • All three months were made in months with red candles (normal service resumed!!)
  • The monthly ranges, in which the tops were made, were 12.8%, 23.2% and 30.2%
  • The first ATH was 10.8% above the previous ATH (Feb. 2000). All three were blow-out highs with months of sustained upmove prior to the tops.
  • The RSI tops were 78, 82 and 85 prior to each of the ATHs.

NIFTY_03

NIFTY Trying to grow up? – 2009 Onwards

It might be fair to say that NIFTY has nursed a long hangover of it’s wild years. Every time NIFTY has moved up, people have looked for a premature top (atleast IMO). During this period, NIFTY successfully made 4 tops and a fifth one will happen sometime in the near or far future. These four tops happened in November 2010, May 2013, February 2015 and September 2016.

  • 3 of the four tops were made in months with red candles.
  • The monthly ranges in each of these four months were 10.2%, 5.2%, 9.3% and 4.6%.
  • The first ATH was 43.5% higher than the previous ATH (Jan 2008)
  • The RSI tops prior to these market tops were 68, 61, 83 and 63 respectively.

What does all this mean?

  • Of the 13 tops on monthly charts, 9 were made in months with RED candles.
    • 3 of the four tops made with green monthly candles were made between 1995 – 1998.
    • So, there is a > 70% approaching 90% chance that the top will be made in a month with a red candle.
  • NIFTY has tendency to make ATHs (post-consolidation) at 8-10% above the previous ATH. Beyond this, it doesn’t stop till it reaches the 30s.
  • The average monthly range for a top month is 13.13% and the median monthly range is 12.8%. Only 4/13 have < 10% monthly ranges and the highest concentration is between 9 – 13%!!! Remember this is range for ONE month.
  • All but one of the ATH tops were preceded by huge GREEN candles on the monthly charts.
  • Two of the ATH tops were made with RSI @ 72 whereas RSI was > 78 for all other ATH tops.

Where is the NIFTY today?

Monthly range for June is < 2% with the current ATH being 6.4% above the previous ATH AND the current RSI high is 69.6. I shouldn’t need to spell out where my interpretation of the price action is pointing.

BUT and this is a huge caveat, History should be taken as an indicator but not a predictor of the future. There is a first time for everything!

Thanks for reading so far! I’m reachable @jdsfinance on twitter.

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