Weekly update - Markets are at historic highs but the risk stays elevated

This is the weekly update on the markets and we will study the charts and see what sense we can draw from them about the current state of the markets.

Small-Cap Index

The chart below is of the smallcap index. One can see the price on the top and the bottom windows is the momentum. As we can see that indicator in the bottom window is showing high readings, and we can see with the red circles marked that whenever we have had such high readings in the momentum it has been followed by a period of correction or consolidation. Of-course this is not a sure shot but it puts into perspective the heightened risk at this point in time. Typically the over-bought(or high) readings on momentum indicators signal a strong trend but they also point to either a time correction or in some cases a price correction based on where they occur during the course of the trend. On weekly and monthly time-frame such readings for a prolonged period of time can be followed by a reversal pattern which can signal the end of the trend. Fortunately for us that is not the case now. Hence we are perhaps looking at some near term volatility and also a minor pullback and a period of consolidation.

Mid-cap Index

The chart below of the midcap index highlights the same thing. Very high readings on the momentum in the bottom window and the price at all time highs on the upper window. The red circles point out what has happened when similar high readings in momentum were recorded earlier on. One can see that the market has rarely spent much time over the current momentum readings and whenever such high readings have been recorded we have got a correction. While this may not guarantee that a correction will take place it certainly increases the chances of one. It also makes the market more susceptible to a correction in case a negative news were to hit the market.

Nifty

The below is the chart of the Nifty on monthly timeframe and we can see how rarely these high readings on the momentum have been recorded earlier. We again see that the market is extremely overbought and from a risk to reward perspective this is not a great entry point. While the top may not yet be in place its certainly closer to one. Remember on the monthly timeframe couple of candles are also two months! The evidence at this time points to overheated markets and we need to be mindful of this when entering new positions.

The above charts point to some long term momentum indicators which are now at historic highs. An important point to remember is that they have not turned down yet which means that the trend and momentum continue to be up even though the momentum is slowing down. It is wise in these types of markets for one to bide their time as making a new commitment in either direction is not easy as the trend change may take place but the timing of it is not certain.