The benchmark Nifty50 (Nifty) has successfully scaled Mount 21k. Nifty has now gained over 23% in the previous nine months and ~16% YTD 2023. Though India is one of the best-performing economies globally, YTD2023 Nifty has underperformed the markets in Japan, Germany, the USA, South Korea, and France – economies struggling to avoid recessions.
At 21k, Nifty is now trading 10% higher than its 200-day exponential moving average (200EDAM). In technical studies, 200EDMA is considered one of the most important pivots in studying long-term trends. Several empirical studies have concluded that any significant deviation from 200EDMA is usually not sustainable and the underlying indices tend to converge back to the average line.
Observing the Nifty trends over the past 25 years, I find that whenever Nifty has deviated over 10% from its 200EDMA, it always tends to revert to 200EDMA, albeit not always immediately. Once Nifty deviates more than 10% from its 200EDMA, on most occasions, it stretches beyond 15%. Nonetheless, there has been a strong tendency to revert to 200EDMA on most occasions. In fact, in over two-thirds of the cases, it has reverted to 200EDMA or even violated it on the opposite side.
Presently, Nifty is trading about 10% higher than its 200EDAM (19108). Another 500-point rally would bring Nifty in the red zone. Though Nifty might continue to rise thereafter, it will always be susceptible to a significant correction, making the risk-reward ratio materially adverse for the traders.
For traders, therefore, it is advisable to exercise utmost
caution while taking leverage positions, playing momentum in stocks with poor
liquidity, and/or taking significant positions in irrationally valued stocks.
For investors, it is desirable to rebalance portfolios by trimming any
overweight position and maintaining some liquidity for a probable opportunity.
