Like people, stock markets too lose weight! Here is how

Markets are like people!

And just like some of us shed those extra kilos and get back to our original shape in due course, markets also cut their excesses and return to a healthy zone. In market terms, this phenomenon is known as reversion to the mean.

What is mean reversion?

Globally, most analysts—technical or fundamental—use the 200-day moving average (200 DMA) as a long-term benchmark. Markets often revert to this average after reaching extremes, whether it’s a bull market excess or a bear market slump. Interestingly, after its recent fall in October-November 2024, the NIFTY50 has come close to its 200 DMA. While no one can guarantee that it will take support here and bounce back, it’s fair to assume that the market is approaching a healthier zone.

NIFTY50 & 200 DMA

Source: Tradingview on Upstox

While it’s tempting to assume that markets may take support at this level, it's prudent to seek further confirmation. Here are some additional observations about NIFTY50:

• The Relative Strength Index (RSI) is near 30, indicating that the index is oversold.
• The RSI also shows a bullish divergence (learn more about it here.)

How do smart investors approach such situations?

Many experienced investors tend to rely on probabilities rather than emotions. During market corrections, some choose to stay calm and observe trends, while others may opt to gradually accumulate quality stocks with a long-term perspective.