The last few weeks (esp. the last one) have been hard for a number of people (including me).
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
- This correction has gone beyond the -3 SD on the Bollinger Bands!
- 8 of the past 9 weeks have been red candles on the weekly charts.
- The correction has landed at the doors of the 100 WSMA @ 10848.95
Now Lets review the Monthly Charts
- Two consecutive red candles have been formed.
- 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?
- September – October 2018 correction ended at -0.5 SD BB on the Monthly Charts
- It also ended just below the 100 WSMA.
- The 2018 correction had lasted 8 weeks.
- 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.