Testing Resolve - An Addendum
The US market impact on the Indian NIFTY.
This was the conclusion of the last post from yesterday “The Market Equation - Testing Resolve”. You can read the post at the link above.
Conclusions from the Analysis
Most Likely:
The market likely bottomed out at 21964.
In the short-to-medium term, the upward move should continue after a minor pullback or consolidation. A logical target on the upside is the 200 D-SMA at 24100 and then the previous major swing high at approx. 24800.
The price gaps formed in this last move should form a substantial point of support.
The worst case, possible over the remainder of the year, is a retest of the current low with a margin of +/- 2%.
Least Likely: The market reverses course significantly and breaks below the recent lows.
This scenario goes against the strong historical probabilities associated with positive "outside months" and the pattern of making a new high after a significant low.
The primary risk factor supporting this view would be if the stalled weekly momentum resolves downwards instead of upwards.
You might ask → What is the need for an addendum? A handful of subscribers asked me today, probably looking at the GIFT NIFTY and the SPX, whether the NIFTY will be able to endure the carnage from the US markets? As of writing this, the GIFT NIFTY is dow ~ 1%.
The short answer to that question is YES.
Why I Think This (My Reasoning):
My US Market Expectation: I predict a significant drop in US stock markets soon (within the next quarter or two). I expect the Nasdaq (NDX) to fall at least 25% and the broader S&P 500 (SPX) to fall 15-20% at some point this year. I note the Nasdaq is already down about 16%, suggesting more decline is likely still pending.
Reason 1: Opposite Movements (Decoupling)
Right now, looking at a 2-week timeframe, the Indian NIFTY and the US SPX are moving in opposite directions (a negative correlation of -0.66).
This means recently, when the US market (SPX) went up, the Indian market (NIFTY) tended to go down, and vice-versa.
This is unusual; I call this "record decoupling," meaning they are acting independently to an extent I haven't seen before. This suggests the NIFTY might not automatically follow the SPX downwards. I don't know how long this will continue, though.
Reason 2: The US Dollar Effect
There's currently a strong inverse relationship between the NIFTY and the US Dollar Index (DXY).
This means when the value of the US Dollar falls (DXY goes down), the NIFTY tends to go up. Ideally, this should be negative, and it's working out that way quite extremely this year.
I note this relationship is very strong right now.
Reason 3: Potential US Policy (Trump Factor)
A stated aim of the Trump sarkar is to "hammer" the US Dollar, meaning weaken it significantly.
Why might they do this? A weaker dollar could help US companies that import goods by mitigating the impact of import taxes (tariffs) and could boost their profit margins even if the administration pressures them not to raise prices. This would be a double whammy for companies exporting goods to the US.
How it helps India: If this happens and the US Dollar weakens (DXY falls), it should generally work well for Emerging Markets, and by extension, the Indian stock market (NIFTY).
My Conclusion:
Even though I expect US markets to fall significantly, I believe the Indian NIFTY might hold up better than expected. This is because:
NIFTY is currently moving independently (or even oppositely) to the US market (SPX).
NIFTY benefits strongly when the US Dollar weakens.
There's a possibility (linked to potential future US policy) that the US Dollar could weaken, which would further support the Indian market.
In simple terms: The usual link where a falling US market pulls India down seems broken for now, and factors related to the US Dollar could actually help support the Indian market, in my view.