The last few weeks (esp. the last one) have been hard for a number of people (including me).

The Baseline

NIFTY made a high of 12103.25 (the curse of the thousands played out again) and has since then corrected to a low of 10848.95 in 9 weeks. This is a move of 10.36% at an average pace of 1.15% per week. As far as pace of corrections go, this has been a fairly tame correction. The average pace of the last 5 weeks has been 1.89% per week.

What does History tell Us about Corrections

First of all, it’s a good idea to review this twitter thread of mine reviewing corrections on the NIFTY since 2002.

Now what about this correction?

Lets review the Weekly Charts

1. This correction has gone beyond the -3 SD on the Bollinger Bands!
2. 8 of the past 9 weeks have been red candles on the weekly charts.
3. The correction has landed at the doors of the 100 WSMA @ 10848.95

Now Lets review the Monthly Charts

1. Two consecutive red candles have been formed.
2. The correction has *almost* tested the -0.5 SD BB (10793.xx)

So, NIFTY has reached the same levels as the Sept – Oct 2018 correction.

 How do these levels compare to the 2018 correction?

1. September – October 2018 correction ended at -0.5 SD BB on the Monthly Charts
2. It also ended just below the 100 WSMA.
3. The 2018 correction had lasted 8 weeks.
4. It never went close to the -3 SD on the Weekly BB.

 

Now that we have the context lets try and peer into some additional data points ….

The value of the -3 SD Bollinger Band Test

• The NIFTY has tested the -3SD on the Weekly BB only ten times in its entire history!
• 6 / 10 times, the NIFTY low in the week of -3SD BB test was within 2% of its intermediate low.
• 8 / 10 times, the swing low happened within 2 weeks (or in the same week) of the -3 SD test week.
• 7 / 10 times, the low formed within that 1 – 3 week period was the final low.
• 3 / 10 times, the market made a substantially lower low (it turned out to be start of a bear market)

The duration of the fall (>= 9 weeks)

• There have been 7 instances since 1997 where the singular fall / correction lasted >= 9 weeks
  • One of them lasted 9 weeks
  • Two of them lasted 10 weeks and 13 weeks each
  • The remaining two lasted 11 weeks and 12 weeks each
• Only 3 / 7 had <= 1 Green candle in the entire journey from top to bottom (similar to the current correction)
• 4/7 corrections made a final low whereas for the remaining 3/7 instances, the low formed by this correction was within 4% of the final low.

Now we come to the Now or Doomsday (Monthly Charts)

If the NIFTY breaks the -0.5 SD on the Bollinger Band conclusively, then it tends to test either or all of the following

• The 50 MSMA (9654)> Rising at 52 points per month
• -2 SD on the Bollinger Band (10047).
• -2.5 SD on the Bollinger Band (9818).

In a worse case scenario, can also test the 100 MSMA (8050).

In a nutshell

• There is a high probability an Intermediate Term low has either formed or will form within the following parameters
  • Previous week or within the next 1 – 3 weeks
  • Current low or within the 2% – 3% of the current low.

 

• IF there is a sustained break of the -0.5 SD Bollinger Band on the Monthly chart (10793), then its time to sit back and watch the chaos unfold. IF that happens, then the current correction will feel like a bull-market. 

 

Disclaimer – The above is my market analysis and should NOT be considered as any kind of market advice. I am not certified to provide market advice.