How bad is the situation?
The question, “Why is Nifty falling?”, has become one of the most frequently asked in recent times, especially among new investors and traders who entered the markets after COVID.
During the ongoing post COVID bull run, the current fall is the second most significant fall after June 2022 fall when nifty fell by 19%.
It is important to note that the current fall is sharper with little to no pullbacks compared to June 22 fall. As on this date, Nifty has corrected around 16% from the all time high.
The fall has been quite secular affecting all sectoral Indices which experienced deep fall ranging from 15 to 25% on average.
Both small and midcap indices have fallen more than 20% from the top. Nifty 500 has fallen around 20% which shows the fall has affected all stocks irrespective of marketcap and sector.
Reasons of the fall
We will try to analyse the question ‘Why is Nifty falling’ in two parts:
Macro reasons
- United States imposing trade tariffs on countries raising fear of global trade war.
- Latest US economic data shows a slowdown in the economy.
- Strengthening of Dollar which means weakening of Indian currency making imports costlier.
- Foreign Institutional Investors (FIIs) are consistently selling, driven by factors such as high valuations in Indian markets, elevated taxes, a strengthening US dollar, and more attractive opportunities in other markets like China.
Technical Analysis
In this section, we will analyze Nifty’s fall using Technical Analysis, completely ignoring news-based factors.
The post COVID bull run which started in April 2020 saw nifty increase more than 250% in a very short span of time which did not see significant profit booking or major trend change.
This is evident from the fact that Nifty’s RSI on the monthly timeframe soared to 83. To put this into perspective, Nifty has breached this level only twice in its entire history in 1992 and 2007.
If we were to answer ‘Why is Nifty falling’ in very simple terms, this study of RSI is enough to answer it, too much of a rise in a short period of time.
For us, this fall was long due and is nothing extraordinary.
The above chart is a deviation chart wherein the blue line is a 200 moving average while red and green lines are 2 deviation away from the moving average.
Standard deviation is a statistical calculation which tells us that 95% of time price should stay within the 2nd deviation (represented by red and blue lines).
Price crossing the red line (marked by circle) meant that price could not sustain at those levels for too long.
Further, when the price broke 24000, which was a very important support, led to change in trend and sentiments of traders and investors.
Where will the fall stop?
Straight answer would be, no one knows. But we can try to study history to make sense of markets.
We have seen the June 2022 fall was about 19% post which the bull run continued. Current fall is about 16% so there is no need to panic as of now.
Zone 21500 to 22000 is actually a very strong support where buyers would be willing to buy. If the worst is to happen and the nifty breaks this zone, Nifty would officially enter a bear market during which markets would either continue further downtrend or enter a consolidation phase.
The blue line is the 21 simple moving average on the monthly chart of nifty. We can observe how well it has worked as a dynamic support for nifty for multiple times in history.
Price is again approaching the 21 moving average which is currently near the same zone we talked about, 22000 which further adds to the confidence that this zone might just hold.
So, concluding the post,
‘Why is Nifty falling’ – The recent decline can be attributed to multiple factors, including concerns over global trade, weak economic data from the United States, and sustained FII selling. Additionally, investors are finding better opportunities elsewhere, leading to capital outflows. From a technical perspective, the RSI was overheated, signaling an overbought market ripe for correction.
When will the fall stop – 22000 to 21500 is a very good support beyond which we may have to bear more pain.