Learn · Regime
Six kinds of market
Before asking what will happen next, it helps to say what kind of market this is. Two questions sort almost every day into one of six kinds.
Two questions
What is the trend? Compare the index with its 200-day average, and its 50-day average with its 200-day. If the price and the 50-day are both above the 200-day, it is an uptrend. If both are below, a downtrend. Anything else is a market at a turn.
What is the mood? Compare volatility with its own middle level over the past year. For Nifty 50 that is India VIX. Above its usual level, the market is fearful; below it, calm.
The six
- Uptrend, calm: the ordinary state of a rising market.
- Uptrend, fearful: rising prices with nervous option buyers.
- Turning, calm and turning, fearful: the averages disagree; the market is changing direction or going sideways.
- Downtrend, calm: a slow slide without panic.
- Downtrend, fearful: falling prices with expensive protection: what most people mean by a sell-off.
Why a rule beats a mood
The value of a rule is that it can be applied to every day in the past, in the same way, using only what was known on that day.
That turns a vague impression ("the market feels weak") into a question with an answer: across all the earlier days of this kind, what did the index do over the next month, and the next three?
The answer comes with its sample. A kind of market seen in three separate stretches is an anecdote. One seen in thirty is evidence.
What it is not
A regime is a description, not a prediction. It says which shelf of history to look on. The spread of outcomes on each shelf is wide, and the label changes only after the market has already moved.
Questions people ask
What is a market regime?
A label for the kind of market a day belongs to, set by rule. Schema uses the trend against the 50- and 200-day averages and volatility against its usual level.
How do you know if the market is in an uptrend?
A common rule: the index is above its 200-day average and its 50-day average is above the 200-day as well.
Why use the 200-day moving average?
It smooths about a year of trading, long enough to ignore ordinary swings. It is widely followed, which is part of why it matters.
Keep reading
Research and information, not investment advice. Historical patterns describe the past and do not promise returns.