After falling for 4 weeks, a pullback is possible in Nifty. Here’s why

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The recent downturn in the Nifty 50 has raised concerns amongst market participants. Historically, the Nifty has shown a pattern of retracing to its moving averages before resuming its uptrend. However, we are currently witnessing a more pronounced decline, with the index dropping below its 100-day moving average. This has prompted questions about whether the market’s current fall is the start of a deeper trend down the hill or simply a flash in the pan before the uptrend resumes.

Now let’s try to figure it out with the help of some data. Nifty has declined for 4 weeks in a row. This is a rare occurrence. An analysis of all such past occurrences from 2010 reveals an optimistic outlook.

Historically, when the market has corrected by 5% or more over four consecutive weeks, the Nifty has shown strong forward returns over the subsequent months. The table displays the 1-month, 3-month, and 6-month forward returns along with the probability of a positive outcome

Period End	Consecutive Weeks Fall	Returns During that Period	1-Month Forward Return	3-Month Forward Return	6-month Forward Return
20-05-2011	4	-6.77%	-2.19%	-11.68%	-10.58%
19-08-2011	4	-13.99%	4.92%	1.24%	14.83%
25-11-2011	4	-12.14%	0.08%	15.27%	4.47%
18-05-2012	4	-7.55%	5.06%	9.71%	13.95%
16-08-2013	4	-8.65%	6.22%	9.95%	10.08%
04-09-2015	4	-10.62%	3.86%	1.66%	-8.17%
18-11-2016	4	-7.12%	0.81%	9.26%	16.77%
28-09-2018	4	-6.42%	-8.24%	-0.65%	4.82%
02-08-2019	4	-6.89%	0.24%	8.12%	11.37%
13-03-2020	4	-17.82%	-8.47%	0.18%	15.16%
04-03-2022	4	-7.26%	8.77%	2.09%	7.97%
06-05-2022	4	-7.72%	1.05%	6.01%	10.39%
24-10-2024	4	-6.80%	?	?	?
Average Return			1.01%	4.26%	7.59%
Positive Returns Probability			75.00%	83.33%	83.33%

Since 2010, there have been 12 occurrences when Nifty has fallen for 4 weeks in a row. Nifty has managed to bounce back in nine out of these 12 occurrences with an average gain of 1.01% over one month. The 3-month and 6-month forward returns are positive in 10 out of 12 instances. The average gains are 4.26% and 7.59% respectively. That’s not all. There are a few more data points which indicate a reversal could be possible.

ETMarkets.com

The percentage of Nifty 50 stocks trading above their 4-week and 10-week simple moving averages (SMA) - are also pointing to a possible turnaround. Historically, the Nifty has often reversed its downward trajectory when only 10% of its stocks are trading above these SMAs. Currently, we see that just 8% of Nifty 50 stocks are trading above their 4-week SMA, and a similar pattern is observed for the 10-week SMA. This indicates that we may be nearing a potential bottom if these historical patterns hold true.

ETMarkets.com

While it is natural to be concerned about the recent market decline, historical data suggests that the Nifty 50 may be poised for a recovery in the coming months. The probability of positive returns over the 1-month, 3-month, and 6-month periods following such corrections is high. As always, I encourage investors to remain vigilant and informed and be prepared for both short-term volatility and long-term opportunities.

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