How Strong is the Trend of Nifty? A Quantitative Perspective

  • Stock Market Analysis

The broader market Nifty 50 index has been ripping the bears apart since it started to move towards the North amid a 52-week low of 15,183.4 on 17 June 2022. The one-sided rally from the lows, without any noticeable correction, has almost become a nightmare for bears with no hurdle in the way being able to stop the rally.

The world knows, that the index is highly overbought since the last many sessions. On the daily chart, the RSI (14) is currently showing a reading of over 80 which makes the Nifty not just overbought but also shows the current momentum is the sharpest since September last year. This means, that the last time RSI showed a reading of 80 or above was almost 11 months back when the index rallied from 15,709 on 28 July 2021 to 17,630 on 16 September 2021, almost 1,920 points rally in 34 sessions, translating into an average up move of over 56 points per session.

Coming to the current rally, If we take the lowest closing for the year (15,293.5 on 17 June 2022) and the current market price of 17,700 today, then we have witnessed a rally of around 2,047 points in 38 sessions, depicting an average up move of over 63 points per session. For those who got trapped in this rally, it is not easy to gauge these uncommon moves.

Image Description: Daily chart of Nifty (spot) with 50-day moving average and ADX at the bottom

Image Source: Investing.com

Another way to look at the once-in-a-while rally is through the lens of the Average Directional Index (ADX). It is an indicator that depicts the underlying strength of the trend, often slow to react but is widely used to determine how strongly the market is trending. Currently, ADX (daily, 14) is depicting a value of 34 which is comfortably higher than the trending signal of 20. This means, above the reading of 20, the stock/market could be considered to be trending (irrespective of the direction). The last time ADX showed a reading of 34 was back in October last year, again marking the current rally as not so common. 

Now looking at the most popular trend-following indicator, the moving average. These averages are used to determine the trend of the security but how do you estimate how strongly the market has risen/fallen using the moving average? The answer lies in the deviation from the average. There is a way to calculate the market’s overbought/oversold situation simply by calculating the deviation of the market from its respective average.

In the current scenario, the current price of the Nifty is 17,700, which is 1,383 points away from the 50-day medium-term average. The last time we had seen the Nifty rallying over 1,300 points away from its 50-day average was also way back in October 2021, when the index made its lifetime high and ended its bull run which started from the COVID-19 pandemic. 

All in all, we can say that the current momentum and strength in the ongoing rally is the strongest in over 10 - 11 months, hence it would be no surprise if short sellers during this ferocious rally would have blown up big. 

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  • AMAN PUJARA @AMAN PUJARA
    Highly appreciate your study... Off late, I have been following your chart analysis and have done a few profitable trades as well based on the same. Awaiting the same and in case its an F&O stock, it helps a kot😊
    Like 0
  • Aakash Doshi @Aakash Doshi
    Amazing Data Points.. new way to look at the rally.
    Like 0
  • Aakash Doshi @Aakash Doshi
    Amazing Data Points.. new way to look at the rally..
    Like 0
  • Aakash Doshi @Aakash Doshi
    Amazing Data Points.. new way to look at the rally..
    Like 0
  • Selva Kumar @Selva Kumar
    very good interpretation
    Like 0

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