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.

NIFTY – Move Analysis – 1991 to 2017 – I

Thanks to everyone for the amazing feedback for the previous post.

The question that triggered off this analysis was “Has the NIFTY moved too far, too soon and is a major correction imminent?” If you’ve heard any of the analysts on TV, you would know that there is a rare fund manager or analyst who believes in this rally.

This post is an attempt to look back at NIFTY’s history to see what it can tell us. This post is not about Technical Analysis, but pure and simple data analysis. For the record, you know of my views of the move from my previous post. 😊

The Tools for the Analysis

  1. 20WSMA (20 Weekly Simple Moving Average) is something I’ve used for a while now.
  2. Upmove duration is defined as time spent by NIFTY for any duration >= 10 weeks above the 20 WSMA. It is not time from bottom to top; but rather the time duration between retests of 20WSMA. The filter is a move that lasts for >= 10 weeks.
  3. Downmove duration is defined as time spent by NIFTY for any duration >= 10 weeks below the 20 WSMA. It is not time from top to bottom; but rather the time duration between retests of 20WSMA. The filter is a move that lasts for >= 10 weeks.
  4. % move is the difference between the last point at which the 20WSMA was crossed and the following top or bottom before a retest of the 20WSMA.
  5. Clarifications
    1. One bull or bear market move could encompass multiple tests of the 20WSMA, but for the purposes of this analysis, each of the tests or retests is considered a separate data point.
    2. All the selections e.g. 20WSMA and 10 weeks are arbitrary and my choices, you can do the same analysis on any moving average or any duration.
    3. Numbers are close approximations, because I took the data from the charts rather than any database.
    4. Data is up to the 30th April 2017.

Back to the Analysis

Background data

Since 1991, there have been 28 instances where the NIFTY has spent >= 10 weeks above the 20WSMA and 24 instances where the NIFTY has spent >= 10 weeks below the 20WSMA. Some simple data points,

  • In total amongst these 52 instances (including the current one), NIFTY has spent 978+ weeks in trend i.e. 18.8 years of 26+ years. Who said the markets trend only 30% of the time?
  • The averages are (skewed by outliers of course)

 

Parameter 1991 – 2017 2007 – 2017
Number of Upmoves 28 10
Average Upmove % 39.71% 29.73%
Average Upmove duration 21.67 Weeks 23.44 weeks
Price move per week – Upmove 1.83% 1.23%
Number of Downmoves 24 8
Average downmove % -21.39% -19.24%
Average downmove duration 15.43 Weeks 12.87 weeks
Price move per week – downmove -1.46% -1.38%

The crux of the analysis

Now that we have some idea of the overall picture; let’s get down to the key elements of the analysis. Some of the questions that we’ll attempt to answer are:

  • What kind of rally is this?

    • This is the 4th slowest rally since 2007 and the 6th slowest overall with a change of 0.88% per week. Why does it matter? Slow rallies are, generally, followed by less damaging corrections. As a side point, this is the slowest rally, ever, that began between December – February.
    • Upmoves starting in December – February were comparatively common i.e. 9/28 overall; but this is only the second since 2007. They’ve become a rare-breed since 2007!! Also, such moves don’t last long i.e. average duration is 15.4 weeks; but most data is prior to 2007, so probably not that important an indicator.

NIFTY_MONTHLY_TOPS_BOTTOMS

 

 

 

 

 

 

  • When do the probabilities of this rally ending, begin to rise?

    • NIFTY, very rarely, makes an intermediate top in Q2. The occurrences are only 3/28
    • There is a good chance that one of April – August (at 1 in the above chart) will change. The question is which one? This is a tough one and your guess is as good as mine.
      • 40% of all Upmoves have ended in 17 / 21 – 23 weeks but the Modi moves have lasted 32 (2014) and 27 (2016) weeks respectively. The average upmove duration since 2007 is 23.45 weeks.
      • The mean and median duration all Upmoves which created an ATH are between 22 – 24 weeks.
      • The mean and median duration of all the Upmoves is 21 – 22 weeks.
      • So, here goes the educated guess
        • If we hit the upper-end of the 22- 24-week mark (Modi rally tendencies), there could be a top in another 6 – 8 weeks. That means a top in late-June or more probably July.
        • That would also mean 5-6 consecutive positive monthly candles; which is something that the NIFTY has tended to do in the recent past.

 

  • In the meantime, how much further can this rally go?

    • Assuming we carry on with ~0.85%-0.9% move per week for another 6 – 8 weeks, we should have another 6-7% upside, for a rally of 17%+; which is also the median since 2009 i.e. the last bottom.
    • Need to remember that of the 16 Upmoves (since 1991) which made an ATH, only 3 have ended with a rally < 20%.

 

  • What kind of correction we’re looking at?

    • A substantial one. 2/9 corrections, following similar moves, ended at the 20WSMA. Others just stopped there to take a bit of rest, before driving further down to test the lower Bollinger Band. These numbers are dynamic, but as of today that is a 12-15% kind of correction.
    • Is there anything good about this? These were all slow corrections with an average fall of <= 1% per week; hence the correction could last upto 3 – 4 months.
    • The slower the upmove and the smaller it’s quantum, the lesser will be the magnitude and speed of the correction.

The Alternate Scenarios

In the above analysis, I just assumed that the NIFTY will hit the median upmove % and duration? What if that doesn’t happen before we retest the 20WSMA? That gives rise to 2 scenarios

  • Scenario A: The move is almost done (Lower probability, IMO, than what we’ve discussed above)
    • In this scenario, I would expect more ongoing consolidation with a smallish fall and a decent chance for a reversal from or just below the 20WSMA.
    • The slowness of the upmove would preclude a major and steep fall, unless the world goes to hell.

 

  • Scenario B: The move has a long-way to go (Lowest probability, IMO) before the retest of 20WSMA say 10.5K or upwards
    • I can’t figure why this would happen and how this would happen but this would mean a steepening and speeding up of the move at some point in-time with some interim consolidations.
    • There have been only 3 NIFTY rallies longer than 30 weeks; so such a move can’t be a grinding upward move. Of-course once the 20WSMA or the 50WSMA is retested, then another rally is always possible to take out all possible levels.

What does the VIX Say?

I started looking at VIX monthly data, looking for cyclicality and I found some cyclicality; just not as strong or as much as expected. For the record, there is only weakish correlation between a rising VIX and a falling market. With that in mind, the VIX patterns that I’ve seen are

  • Dies post-budget into somewhere between April – July.
  • Rises upto make a high somewhere between July – October.
  • Dies into December – January.

There is almost no guarantee that this will hold; but the VIX is bound to rise sometime during H2. The current fall has been unprecedented e.g. this is the first time ever, IndiaVIX hasn’t touched 15 for two consecutive months.

 

In Conclusion

I’ve listed down a few scenarios based upon how I’ve interpreted the historical data. It is possible that none of these turn out to be true or that Trump does something or Le Pen wins or Merkel loses or there is a war with North Korea or another black swan event happens and the markets just crack.

Do keep in mind that as the data changes over the next few weeks and months, the probabilities in favor of and against these scenarios will also change.

 

 

I am reachable on twitter @jdsfinance

Disclaimer

This is simple data analysis, done to satisfy curiosity and answer some questions and should NOT be treated as any kind of investment advice.

NIFTY – 20170415

What has the Nifty done?

Long-Term: Nothing much. We were and are at 91xx 25 months apart. 

Medium Term: September 2016 High was 8968 and today we’re at 9150. Again. Nothing much!!

Short Term: The move has been very sluggish (almost a grind-up) since Nifty made a high, after the budget. 

20170415_02

Anyways, my biases and inclinations aside.

Let’s look at the data

Today, I’m going to look at the Nifty and the VIX. So, here go some simple observations

  • Since the August 2013 (FDI in Retail bottom … IIRC), Nifty has spent a bunch of time above the 20 Weekly SMA (approx. 125 weeks) and some time below the 20 Weekly SMA (approx. 65 weeks). Right now, the 20WSMA is @ 8672. 

    Why the distinction? Primarily because, during this period,

    • When the Nifty is > 20WSMA, the corrections (or red candles on the weekly charts, as I prefer to look) have been limited to 3 weeks except for one instance. Also, as would make sense, the “corrections” are much less severe i.e. 5.8%, 5.5%, 7.7%, 3.9% and 4.6%.
    • When the Nifty is < 20WSMA, the falls (or red candles again) tend to last up-to 4 weeks and of-course, the falls are of higher magnitude i.e.  9.3%, 9.5%, 6.5%, 12.55%, 7.3%, 9.2%, 10.2% and 9.4%. 

Now Let’s come back to the current picture

  • NIFTY corrections above the 20WSMA tend to last, mostly, 3 weeks and the Nifty is already 2 weeks in this correction. (I count red candles as corrections / falls). The maximum back-to-back negative weeks have been 4 in one instance in Sept. / Oct. 2014.
  • During this period, a 4 week correction has ALWAYS tested or ended below the 20WSMA. Currently, the average stands @ 8672.
  • The current correction is 1.4%!!!! i.e. waaay lower than any previous correction, in this period, with Nifty above 20WSMA. This “correction” has been surprising in the fact of how little the NIFTY has fallen so far; two weeks into a correction.

What does this all mean?

  • Maybe we can say the greater the consolidation, the lesser the correction?
    • In both the post-Modi up-moves there were two instances of 9 weeks (June – August 2014) and 7 Weeks (July – August 2016) when the Nifty, practically, did nothing for close to two months. (Refer the chart below)
    • Nifty is 7 weeks into some sort of consolidation now.

20170415_03.JPG

So, are we in a one of these “go-nowhere” consolidations?

  • The VIX seems to think so. The last time, VIX was consistently below 15 for a substantial period of time was between August – November 2014. That aligns with the 9-week period of consolidation. 
  • Why is the VIX important in this context? Because, IndiaVIX has quietly, created history
    • The lowest high the VIX has made EVER in a month since it’s inception, was September 2014 – 14.83 (ring a bell!!!!) and March 2017 – 14.72. Current month high is ~12.75!!!!!!!
    • if IndiaVIX doesn’t hit 15 in April: This will be first instance in VIX history that it won’t have hit 15 for two consecutive months!! I mean, what does the VIX need to rise? Trump is threatening to go to war with Syria and North Korea!!
    •  Thanks to the budget in February; This is the first instance where the VIX has fallen below 12 in the months of March & April.

So, what is the conclusion?

  • There are, probably, 1-2 more weeks left of red candles on the Weekly Charts. If during this correction, Nifty falls below 8672; then the alarm bells should ring. 
  • In all the instances of correction above the 20WSMA, Nifty made a significantly new high AFTER that 3/4 week correction.

 

I am reachable on twitter @jdsfinance.