Nifty monthly RSI flags warning sign; here's what happened in the past

Time to be cautious? In the past, the NSE Nifty 50 index has plunged as much 65% from its high after the monthly RSI peaked above the 80-mark. At present, Nifty monthly RSI stands near 83.

The National Stock Exchange (NSE) Nifty 50 index has witnessed a solid 18.8 per cent rally so far in 2024; the major part of the gains came in the recently concluded September quarter. The Nifty had surged 14.6 per cent in the last quarter. 

On the longer-term scale, the Nifty 50 index has trebled or zoomed 200 per cent from its monthly panic close of 8,598 in March 2020. The NSE benchmark index has ended higher in 34 out of the last 54 months, showcasing clear dominance of bulls over the bears. 

However, going ahead, will the dominance continue in the near-term or will Nifty be taking a breather? 

 

Technical chart hints towards the latter, with a possibility of a meaningful correction in the upcoming months based on the overbought conditions on one of the key momentum oscillators.

Nifty v/s monthly RSI

The Relative Strength Indicator (RSI) is a key momentum indicator in determining overbought and oversold conditions of stocks and indices in the stock market. The RSI indicator can oscillate in the range of 0-100. In general, a RSI reading above 70 is considered overbought, whereas a reading below 30 signals oversold condition. Therefore, raising possibilities of a likely trend reversal.

 

Since the turn of the millennium i.e. in the last 24 years, the RSI indicator has crossed the overbought condition on the Nifty monthly scale only on 14 counts, shows technical chart. Invariably, the stock market (Nifty) has witnessed a price correction thereafter.

Off the 14 counts, there have been only 4 instances including the present case wherein the Nifty monthly RSI has crossed the 80-mark. The Nifty monthly RSI as of date stands at 82.7; this momentum indicator had hit a high of 83.10 in September. As of now, it’s not sure if the RSI has peaked or not. CLICK HERE FOR THE CHART

Nifty RSI above 80: Here's what happened in the past

Since the start of the 21st century, the Nifty monthly RSI crossed the 80-mark for the first time-ever in March 2006, and peaked at 82.80 in the following month (April 2006). The Nifty from a close of 3,560, went on to hit a high of 3,774 in May 2016, and then plunged to a low of 2,596 - down 31.2 per cent from its May peak.

 

Similarly, the Nifty RSI peaked at 85.80 (the highest till date) in October 2007 with the index at 5,000 levels. Thereafter, the Nifty registered its summit at 6,357 and then crashed to a low of 2,253 - down a massive 64.6 per cent in a matter of 10 months.

A decade ago, in November 2014 the Nifty monthly RSI peaked at 80.80 with the index value at 8,588. The Nifty, thereafter, registered a new all-time high at 9,119 in March 2015 and then slid to a low of 6,826 in February 2016 - down 25.2 per cent.

Is it time to exit stocks now?

As explained above, invariably the Nifty has indeed corrected after the RSI peaked above the 80-mark. However, at the same time, data shows that the Nifty in value terms has peaked a month or so later after the RSI has peaked. 

It seems likely that the RSI, which in general is also the lead indicator, tends to peak ahead of the actual underlying asset/ index. In 2006 and 2014, the Nifty rallied another 6 per cent after the RSI peaked and thereafter the correction took place. In case of 2007, the Nifty surged as much as 27 per cent post the monthly RSI peak and then came the massive fall.

Thus, while it may be time to get cautious, but not panicky suggests the historic trend thus far. The Nifty may very well scale another 1,000 points or so before the anticipated stock market correction sets-in. 

Nifty technical chart

The NSE Nifty 50 index at present is seen closing on its super trend line support at 25,650-odd levels; below which immediate support for the index is seen at 25,500 levels - the 20-DMA (Daily Moving Average). On the upside, resistance for the index is seen at 26,335 and 26,665 levels. 

The Nifty will need to break above 26,700 levels for fresh upside momentum. On the flip slide, break and sustained trade below 24,500 levels, could weaken the existing bullish set-up, suggests the medium-term chart.