In our earlier post –S&P 500 and VIX–Fear at 10-25 Year Highs–Time to Buy and be Contrarian we looked at how US markets have priced in a lot of fear. Nifty had not hit oversold levels but now it has hit a RSI of 23-25 and is now Highly Oversold.
Below we make a conclusion let us try to look at what happens When Nifty is highly oversold. Lowest reading in 2008 start was around 18 and post that 20-25 is the lowest band.
Have done a few videos on RSI on my youtube channel – https://www.youtube.com/user/noorrock2002 ( Can look through them.)
Its a long post ( may try explaining this post in a video soon )
1) Nifty August 2019
RSI hits a low of 23. Hits a low 10782 on 5th August 2019
Next bottom at 10637 on 23rd August 2019 . Positive Divergence with RSI at 31-32
A higher bottom on 19th September at 10670.
1.3% lower on 2nd bottom and major rally started after 1.5 months.
Also notice breaks the sloping trendline and a short term bottom got taken out. Support at previous bottoms around the 10600 mark.
2) Nifty October 2018
RSI hits a low of 22. Nifty hits a low of 10261 on 5th October 2018
Next Bottom at 10138 on 11th October. Positive Divergence with RSI at 26.5.
Another Bottom at 10004 on 26th October 2018. Triple Positive Divergence with RSI at 30.
2.5 % lower on the bottom and the rally started after 3 weeks.
Also notice how trendline and 2 lows got taken out. Support at previous major bottoms.
3) Nifty November 2016 – ( Demonetization and Trump )
RSI hits a low of 22.5. Nifty hits a low of 7916 on 21st November 2016.
Next Bottom at 7893 on 26th December 2016. Positive Divergence with RSI at 32
Marginally lower and the rally started.Almost a month.
Support taken at previous breakout and Retest. Co-incided the Brexit.
4) Nifty August 2015
RSI hits a low of 24.5. Nifty hits a low of 7770 on 24th August 2015.
Next bottom at 7545 on 07th September 2015. Positive Divergence with RSI at 26-27.
Next bottom at 2.8% lower and the the rally started with an interim higher bottom.
Broke couple of lows and took support at previous major bottoms.
The rally fizzled out after a 10% move. Dow Jones retested these lows by a small margin but Nifty bottomed at 6900 in February 2016. Smallcaps were relatively resilient.
5) Nifty end of 2011.
RSI hit 24 . Nifty hits a low of 4720 25th August 2011. ( An interim bounce to 5360 with higher bottom.)
Next bottom at 4640 on 21st November 2011. RSI Positive Divergence.
Another bottom at 4530 on 20th December 2011. Triple Positive Divergence.
4% lower on the bottom and a 20% rally in 2 months. Took almost 4 months to bottom out.
Broke couple of previous bottoms.
Support taken at bottom of channel and previous bottoms.
Gold topped out in September 2019. Most global indices bottomed out by November. India and Taiwan did so in December by a marginal lower low.
6) RSI 2008
Quick Bottom in January 2008 with a RSI hit of 17-18. Two lower circuits.
Retest and a bounce of 15%.
Broke the supports in June 2008.
RSI bounce of 20% in July 2008.
RSI Divergence Flopped big time in end of 2008. ( Remember buying half intended qty at 10k and seeing 8k on Sensex in next week and 10k back the week after that and then again near 8500 in 2 weeks. Then markets went in a range till March 2008 )
VIX hit 85 in 2008.
Over the last 10-15 years major bottoms in Nifty have been created when it hits the sub 25 band.
The next low or triple divergence makes a low between 0-5%
The bottoming out has taken between 3-6 weeks generally apart from 2011.
Apart from 2015 where the move fizzled out after a 10% pop but many global indices did not break those lows.
CBOE VIX hit 45 odd levels in 2018/2015/2011.
Nifty at 11100 and RSI at 23.5
CBOE Vix at 45+ with S&P 500 and Dow Jones showing sub 20 RSI is a very similar fear situation like 2018/2015/2011 and some more previous times. ( there are other bottoms also at 30 RSI. maybe will cover that in a video.)
In such periods a lot of supports do get broken for a few weeks. Like 11600 is gone and now we are testing 11000-11200 channel.
Everyone would love a V shape recovery but history does not suggest a V shape recovery. Even if not a full retest but a higher bottom after the bounce would confirm strength.
If looking at history to repeat the bottoming out could take 2-4 weeks and not very far from current zone.
Even if there is no retest and positive divergence in coming weeks one may look for confirmation by crossing of intermediate highs in between the next few weeks.
Such bottoming out is painful and creates a lot of fear but leads to a good stream of trending opportunities with new sectors and stocks in next 1 year.
In 2011 Gold was supposed to be 5000 in next few years in dollar terms. Still not able to cross 1700 in current panic.
What excites me is the fact that every time that I have seen 45-50 VIX and 20-25 RSI it gives me jitters but the next 1 year has been very rewarding !!
Also even today the broader markets and smallcap indices present very interesting opportunities. Time to work harder over next few months.
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