BEAR MARKET :CONFIRMATION AND THE ROLE OF RSI & 10 SMA ON MONTHLY CHARTS

With Nifty & Sensex coming down from highs of Jan 2018 and lot of portfolios having retraced 20-30% from top, there is lot of confusion as to where market is headed. The opinion is split down the middle. Bull camp is treating this is mere correction in on going BULL market and expect to hit new highs in coming months. Bear camp is sure that this is beginning of Long BEAR market and we are getting target from 9000 till all the way down to 6000. 

We will try to analyse, in this article, How the Beginning of Bear Market looks like and when we get confirmation of Bear market. For the purpose of analysis, we will be looking at SENSEX chart since 1990 on Monthly Time Frame. Also, we will be using Two Technical Analysis Indicators for our analysis :A) RSI - Relative Strength Index (14, S,9) & B) SMA - Simple Moving Average (10) .The Indicators are plotted on monthly chart.

First, let's define a Bear Market in Indian Context. As per International Definition of Bear market, whenever Index drops 20% from Top, we are supposed to be in Bear market. However, historically, Indian markets have been much more volatile. Sensex easily corrects 25 % from top in 2-6 months even in running Bull market and hence, can't be considered as Bear Market. Hence, we will define Bear Market as one when A) Index drops more than 25 % from Top B) The Time taken for correction from Top to Bottom is more than 6 months.

Based on above criterion, so far we have experienced 7 bear markets since 1990 and the details are as below:

SENSEX BEAR MARKETS
Sr No Top  Date Bottom Date PriceDrop from Top
(%)
Time (Months)
1 4546 30-04-1992 1980 30-04-1993 56 12
2 4643 30-09-1994 2713 24-12-1996 42 27
3 4605 29-08-1997 2742 30-11-1998 40 15
4 6150 29-02-2000 2595 28-09-2001 58 19
5 21206 31-01-2008 7697 31-10-2008 64 9
6 21108 30-11-2010 15135 30-12-2011 28 13
7 30024 31-03-2015 22494 29-02-2016 25 11

Now lets look at the monthly chart for two periods from a) 1990 till 2003 b) 2003 on wards till date and closely analyse the technical conditions.

 


We can draw following observations from above charts:
1) At the beginning of Bear market , RSI indicator shows reading above 60 in every single condition.
2) Prices closing below 10 SMA is first warning signal of Bear market , though this is not the confirmation.
3) In 6 out of 7 Bear markets (Except 1994), after price closes below 10 SMA, it pulls back above 10 SMA in next 3-4 months.
4) If price does not sustain above 10 SMA after pullback and then takes out Swing low created below 10 SMA, Bear Market is confirmed.

Now, lets look at current scenario:


Currently, RSI reading is above the level of 60 and Price is dangerously flirting with 10 SMA. However, Monthly Close is still above 10 SMA. Bear Market is not confirmed yet based on the price action so far. We will have to patiently wait for another 3-6 months for picture to get clear. We will update you as and when clarity emerges on Bear market conditions. Till then, be ready to manage any eventuality in market and manage risk in your portfolio very cautiously.

Happy Investing.

Comments

  1. Great and Awesome Post. Your knowledge is nice. Thanks you for sharing this post.

    Nifty Future Tips

    ReplyDelete

Post a Comment

Popular posts from this blog

My First Trade in Stock Market..The Journey Begins.

NIFTY BREAKDOWN ON DAILY CHARTS. DOWNWARD SPIRAL BEGINS.