The Nifty 50 daily chart indicates a critical support level around 24,700. If the index drops below this support, it could signal a sharp downturn. This support line has historically acted as a strong cushion for the index, preventing further declines. However, if broken, it might lead to panic selling and trigger a cascading effect in the market.
Several technical indicators, such as Bollinger Bands and Moving Averages, hint at potential volatility ahead. The market is already showing signs of weakening, with multiple red candles and a downward trendline forming. This formation usually suggests increased selling pressure.
Foreign Portfolio Investment (FPI) Outflows: A Significant Concern
Investors are particularly wary due to the recent FPI outflows, amounting to ₹27,142 crore in just a few sessions of October. Such a massive outflow in a short span could indicate a lack of confidence among foreign investors in the Indian equity markets.
Foreign investors seem to be reallocating their funds towards Chinese markets, where valuations appear more attractive after significant corrections. This trend could be a harbinger of more outflows, as global investors might continue chasing perceived bargains elsewhere, leaving the Indian markets exposed to further selling.
Geopolitical Tensions and Their Impact on Market Sentiment
The geopolitical scenario, especially in the Middle East, is another factor adding to investor anxiety. The looming Israeli retaliation against Iran has escalated tensions, driving Brent crude prices closer to the $80 mark. For an oil-importing country like India, this is a negative development. Higher crude prices directly impact inflation and corporate profitability, squeezing margins for companies reliant on fuel and related commodities.
As tensions escalate, there could be further price hikes in crude oil, creating a ripple effect across industries. This development might deter both foreign and domestic investors, leading to a further slump in the Nifty 50 index.
Domestic Political Developments and Market Response
The recent exit polls for the Haryana and Jammu & Kashmir state elections have predicted losses for the ruling BJP. In Haryana, the Congress is projected to secure a full majority, winning between 50-58 seats in the 90-member assembly, compared to BJP’s projected 20-28 seats.
In Jammu and Kashmir, the Congress-National Conference alliance is anticipated to secure 40-48 seats. BJP, on the other hand, is expected to win 27-32 seats. Although these elections are not seen as game-changers for the national market, they could create short-term uncertainties.
The market tends to react to political instability, as it introduces an element of unpredictability in policy-making. Investors might adopt a wait-and-watch approach until the political landscape stabilizes, causing subdued trading volumes and increased volatility.
Technical Indicators on Nifty 50: A Closer Look
- Bollinger Bands: The Bollinger Bands on the daily chart show a narrowing, which typically precedes a sharp move. The price is currently testing the lower band, which is often interpreted as a sign of oversold conditions. However, with the broader market sentiment being negative, a bounce back seems uncertain unless strong buying support emerges around the 24,700 level.
- Moving Averages: The Moving Average (MA) lines, particularly the 9-day, 20-day, and 50-day MAs, show a clear divergence, indicating a bearish trend. The index recently broke below the 20-day MA, which has acted as a strong support in the past. If the price continues to remain below this level, it could further confirm the bearish trend.
- Relative Strength Index (RSI): The RSI on the daily chart has dropped to 36.61, indicating that the index is nearing the oversold zone. Typically, a value below 30 signals that the index might be due for a reversal. However, if selling pressure persists, RSI can remain in this zone for an extended period.
Q2 Earnings Outlook and Market Expectations
The September quarter earnings will start rolling out this week. Kotak Institutional Equities expects Q2FY25 net profits for BSE-30 index constituents to increase by 5.3% YoY and 2.7% QoQ. The Nifty index is expected to grow at 3.7% YoY and 2.5% QoQ.
These growth estimates are relatively modest, reflecting the ongoing macroeconomic challenges. Earnings for Nifty, excluding global commodities, are likely to grow at 10% YoY. However, excluding financials, the Nifty margin is expected to contract by 40 bps YoY to 20%.
If companies fail to meet these already tempered expectations, it could trigger further sell-offs. Investors might decide to stay on the sidelines until there is more clarity on corporate earnings, further adding to the market’s woes.
Global Market Influence: The Chinese Effect
Global markets are increasingly interconnected, and what’s happening in China is impacting India. Chinese stocks have been battered recently, leading many global investors to see value in them. This has led to a rotation of funds from Indian equities to Chinese markets. The shift is evident from the FPI outflows in the Indian market.
If Chinese stocks continue to show signs of recovery, we could see more outflows from India, adding to the selling pressure on domestic equities. The Nifty 50 index, which includes several large-cap stocks favored by FPIs, could witness a further dip as a result.
Sectoral Impact: Midcaps and Smallcaps Under Pressure
Midcap and smallcap stocks are particularly vulnerable in such uncertain times. These segments tend to be more volatile and are the first to be sold off during periods of uncertainty. The current trend shows that midcaps and smallcaps are facing significant correction as investors realign their portfolios.
This trend is likely to continue if Nifty 50 breaks below the 24,700 support level. Midcap and smallcap indices could face even sharper corrections, amplifying losses for retail investors heavily invested in these segments.
Market Sentiment and Future Outlook
The overall market sentiment remains cautious, with several domestic and global factors weighing on investor confidence. The geopolitical situation, crude oil prices, and political developments in India are all contributing to the uncertainty.
If the Nifty 50 index breaks below the 24,700 support level, it could lead to a significant downturn. In such a scenario, the index might find its next support only around the 24,000 mark. This would represent a major correction and could lead to increased volatility in the days to come.
Investors should keep an eye on the upcoming quarterly earnings and political developments. Any negative surprises could trigger a further sell-off. Conversely, if companies manage to beat expectations, we could see a temporary relief rally.
Conclusion
The Nifty 50 index is at a crucial juncture, with multiple headwinds impacting its performance. The key support level at 24,700 will play a decisive role in determining the market’s direction in the short term. Breaking below this level could lead to a sharp correction, while holding above it might provide some stability.
Investors need to be cautious, given the current geopolitical and economic climate. It’s advisable to adopt a wait-and-watch approach, focusing on quality stocks and sectors that are less impacted by global developments. With the Q2 earnings season kicking off, market participants should brace for increased volatility and potential opportunities to buy at lower levels.
In summary, while there are several reasons to be cautious, opportunities might arise for those willing to navigate through the uncertainties with a clear strategy and disciplined approach.
