Nifty50 RSI at 80. Sell Everything and Run Away.

How many of you have received this message on whatsapp or heard on social media that Nifty50 Monthly RSI is at 80 and overbought.

RSI of Nifty on Monthly time Frame have crossed above 80 only 6 times since inception. Each time it was followed by a correction.

March’92, at RSI at 89. Nifty went from 1200 to 600. Correction of 50%!

Dec’2003, at RSI at 80. Nifty went from 2000 to 1300. Correction of 35%!

April’2006, RSI at 82. Nifty went from 3750 to 2615. Correction of 30%!

Oct’2007, RSI at 86. Nifty went from 6000 to 2500. Correction of 60%!

Nov’2014, RSI at 81. Nifty went from 8600 to 7000. Correction of 19%!

Oct’2021, RSI at 80. Nifty went from 18600 to 15300. Correction of 18%!

Lets look at the Nifty50 and Monthly RSI to look at the above message.

I wrote a similar Clickbait Title Article in Jan 2021 at 14k Nifty.  Do read its a fun article.

Nifty at 40 PE. Sell Everything and Run Away !!

 

The Monthly Chart of Nifty50 with RSI

A) March 1992.

Nifty50 index started in 1996 with a 1-2 year backdated data. NSE started operations in 1994.

So I have no clue where the 1992 data came from. Sensex monthly RSI was 92 in 1992 in 1985. So that also does not match

B) Dec 2003.

My data shows 78.5. But fits the Curve and Narrative.

Next 4 months sideways. May 2004 elections led to the 30% correction.

So now we start with the actual 80 + RSI instances.

1) April 2006.

Nifty closed at 3400 on 31st March 2006. RSI at 80 +. High at 3775.

Then came the 30% drop

Nifty was up almost 3x from May 2004 lows.

2) Nov 2006-Jan 2007

RSI did touch 80 + but this does not fit the curve. Only a 10-12% correction so has been passed.

But guess what you would miss if you sold some in end of 2006.

A 50% upmove. 4000 to 6300. 

Also after the previous 30% correction in May 2006 would get back in with a 10-12% correction.

3) Oct 2007

RSI crossed 80 and Nifty was at 5000 on 28th Sept 2007.

High at 6357.

60% correction over the next 8-10 months.

An initial 30% drop from Jan highs to 4450. This low did not break for next 4 months.

If you sold in October start. Would have to see a 20-25% uptick.

The correction would be back to 4450-4500. So a 10-15% downtick from the price you sold.

It took the Global Financial Criss in later part of 2008 to take the markets down by 60% from peak and 40-50% from mid 2008.

4) Nov 2014.

RSI crossed 80 and Nifty was at 8600 on 28th Nov 2014.

High at 9100.

An initial drop to 7950-8000 from March 2015 highs.

This did not break for next 3-4 months.

A correction of 19% from top.

7-10% from the point you sold.

5) Oct 2021

RSI at 79.3. Did not cross 80 but lets take it as we have Hindsight Advantage.

Nifty was at 17700.

An initial correction to 16400 in Dec 2021. We bent back to 18350 in Jan 2021.

It took a Russia Ukraine to take it to 15500. A correction of 18%

6) July 2024

RSI crossed 80 with Nifty at 24950.

As of now RSI at 84. Nifty is at 26200.

Lets c when the correction comes and how much.

Observations

• If you read one message on whatsapp and started increasing cash or did any change to your portfolio. You need to reconfigure your process !! Plain Simple.
• Easier to say OverBought/OverValued and sell Some. Tough to digest 10-50% upside after that and sit through it for the Crash.
• RSI is a very tricky Indicator on a Daily timeframe too. Makes it almost useless on Monthly Time Frame. Totally avoidable for Stocks.

What do we do with RSI then

• I prefer to look at RSI on daily basis and focus on Divergences and that too on Bottoming side.
• Finding a Bottoming out scenario works better with RSI on Indices as Bottoming out is quicker.
• Can just go through the Old Blogs. https://nooreshtech.co.in/?s=RSI+ 

SHAKEOUT or Correction or CRASH

A Simple Definition. 

1) Shakeout = 5-10% fall.

2) Correction = 10-25% fall.

3) Crash = 25-60% fall.

1) Shakeouts do not need a lot of reasons and can keep happening.

This can be just because things have over run in the near term.

2) Majority of Corrections – Out of Syllabus.

Lets take some examples of  recent times

1) Russia Ukraine War.  ( wasnt it supposed to over in 2-3 days. Its now 2-3 years)

2) Covid 2020.         ( If somebody told you World be Shut in March 2020. Would you expect a New All Time High in Nov 2020. )

3) DHFL/IL&FS. Sebi Classification of Stocks.        ( Zerodha had IL&FS as their DP initially for building Trust.)

4) LTCG in 2018.                                                         ( Even today STT > LTCG.)

5) Demonetization in 2016. On Same day as US election results.           ( Real Estate was the Biggest Mover that Year.)

6) Global Financial Crisis 2008.            ( India was decoupled for the first 2-3 months. Dow 10% in 2007end. Nifty up 10%. Who would have thought till then US would take everyone down.)  The Last CRASH

7) Y2K fall.

8) Asian Crisis.

This can go on and on.

What is Common amongst all these Events.

“ NOTHING “

Every Major Correction in last 15 years has been totally out of Syllabus . Can you really Time and Predict those 15-25%  Corrections using OverValuation or OverBought Logic.

One needs to keep an Open Mind and if you remain Sane might be better of Reacting than Predicting !!

Also some of the Biggest Trends come out of these Corrections. The Trends also come into being because of the Event. The Big Rotations post the Correction needs to be the Focus.

Examples

1) Defence/Power/Capitgal Goods/Manufacturing post 2021 peak and Russia Ukraine.

2) Digitization, IT, Pharma, OTT, etc post Covid.

Markets Do not Fall the Similar Event with Similar Intensity

Terror Attacks, Wars, Tax Hikes, Rate Hikes, Fed, Elections. Intensity is not similar on similar events. Some recent examples.

1) Israel Hamas War and other Geo Political Concerns of late compared to the Russia-Ukraine War.

2) LTCG hike in 2024 versus LTCG in 2018.

3) Rate Hikes/Rate Cuts etc.

3) THE CRASH = 25-60% Falls.

Covid Fall came close but was a few days only.

Past Crashes for India were preceded by Parabolic Crazy Moves.

1) 2008        ( 7x in 3-4 years. )

2) 2000      ( Only IT & Telecom Madness. Stocks went up 10-100x. Nifty 2x in 2 years)

3) 1992.   ( Madness before 11x in 4 years.)

Post 2008 its been 18-25% corrections with Rotations as the Upmoves have also been Less Crazier.

Even from the tough times of 2011-2013. Its 11-13 years and the Nifty is up only 5-5.5 times.

So a Crash looks difficult for Now.

Some time in the coming years there should be a Rotational Correction ( 15-25% ). There are a lot of opportunities in such corrections to make Absolute Positive Returns and Outperformance.

This Post is a Must Read – The Rotational Bull Market - https://nooreshtech.co.in/2024/08/the-rotational-bull-market-sunday-thoughts.html 

Conclusion

• Tough to time Every Correction/Shakeout.
• Have Asset Allocation Rules which may be based on Valuations/Cycles or your Personal Situation. Follow it Review it.
• Have Risk Management Rules. How much to Leverage, When to Exit, When to Stay out on basis of Technicals/Market Cycles/ Sectoral.
• Above all do not take an Extreme Call.
• What I mean by an Extreme Call is an Investor going on 40-80% cash and missing out. ( Many such calls end up you coming back at the Top.)
• For a Trader going on High Leverage or all in Euphoric times or on the First Dip.  ( Most Calls lead to being Stuck with Shit at the Top.)

Bottomline – The Markets are in an Uptrend and this is a Rotational Bull Market.

If you get the Rotation Right you may End up with Absolute Returns even in a Shakeout/Correction.