Nifty 50 surged about 9 per cent in the last two weeks, even as global markets face pressure. Despite this recent rise, the index is down about 3.8 per cent since the beginning of this year. Many investors now wonder if India can finally outperform its global peers next year.
Nifty 50 has surged about 9 per cent in just the last two weeks. This rise has come in at a time when the global markets such as the US are reeling under pressure. However, if we look at the data from the beginning of this year, India has clearly underperformed its global peers. Nifty is down about 3.8 per cent. In the US, the Dow Jones Industrial Average and S&P 500 index are up 8.9 per cent and 10.5 per cent respectively so far this year. Similarly, Japan’s Nikkei 225 and Germany’s DAX are up 21.4 per cent and 9.2 per cent respectively. China’s Shanghai Composite is the only one among the major indices which has declined much more than India. The index is down 8.4 per cent.
Even if we look at the big picture, India’s Nifty has been largely oscillating in a wide range since 2024. Nifty’s 9 per cent surge in the last two weeks has happened well within this range. However, there is heightened buzz in the market of fresh Nifty rally.
Can the Nifty outperform its global peers next year? We go back to the concept of ratio chart analysis to see if India can outperform or not. We had written twice, in detail, about ratio charts, how they are constructed and can be used in technical analysis (https://tinyurl.com/portfolioratiochart1, https://tinyurl.com/portfolioratiochart2
). However, for the benefit of the new readers, we first explain the basics of ratio charts and then go into a detailed analysis.
It is important to note this analysis is based purely only on technical analysis.
Ratio charts
Two variables are needed to calculate the ratio. Divide one by the other, you get the ratio value. The ratio can be calculated on a continuous basis and plotted on a chart to get the ratio chart.
For example, take Nifty 50 and Dow Jones. Nifty divided by the Dow Jones will give the Nifty/Dow Jones ratio. Take the historical daily closing value of both the indices and plotting the calculated ratio will give us the daily ratio chart of Nifty50/Dow Jones. The same if done by taking the weekly closing values of both the indices will give us the weekly ratio chart.
Chart trend
The ratio chart can give us two major trends. One, will be the chart going up — a rising trend, and in the other, the chart will move down — falling trend. How should one interpret the ratio chart movement? We use here the same example of Nifty50/Dow Jones ratio mentioned above to explain the two scenarios.
The ratio graph can rise when:
* Nifty moves up; and the Dow Jones falls, or remains stable/range bound, or rises but less than the Nifty
* Nifty remains stable/range bound and the Dow Jones falls
* Nifty falls and the Dow Jones fall more than Nifty
The ratio graph can fall when:
* Nifty falls; and the Dow Jones rise, or remains stable/range bound, or falls but less than the Nifty
* Nifty remains stable/range bound and the Dow Jones rises
* Nifty moves up and the Dow Jones rise more than Nifty
Chart interpretation
If the ratio chart goes up, then the Nifty is outperforming the Dow Jones. On the other hand, a falling graph indicates that the Nifty is underperforming, and the Dow Jones is outperforming.
In a ratio chart, the rise and fall in graph will always have to be interpreted with respect to the numerator, Nifty in our case here.
Also, the ratio chart will give us only the relative performance of two parameters that is being used and not the direction of the absolute price movement. That is, a rising ratio chart does not necessarily imply that Nifty will rise. As explained above, even if the Nifty remains stable or in a range and the Dow Jones falls, the ratio chart can rise.
Forecasting
One of the major advantages of using a ratio chart is that technical analysis can be applied on it and forecast can be made. Indeed, the indicators such as trendlines, moving averages etc. which are used in technical analysis can be applied here as well. This aids in forecasting where the ratio chart is headed. In addition to this, if you have the forecast for any one of the ratio variables and the forecast for the ratio, then you can calculate/forecast the third variable.
Say, that you make a view that the Nifty/Dow ratio can go up to a point X from current levels based on your technical analysis. Additionally, if you have the forecast for the Dow Jones as Y, then X multiplied by Y will give you the forecast for the Nifty. While one can, of course, do a direct technical analysis of the Nifty, this approach is another way to test and validate your analysis.
Limitations
Time-frame of the forecasts made is very important to consider here. That is, forecast for the ratio and the one variable should be done for the same period in order to get the third variable right. Say, if you are expecting the ratio to go up to the point X in three months, then you should have a three-month forecast for the Dow Jones. Else, the logic of identifying the third variable, that is the Nifty here, will go wrong.
Second, if the analysis or the forecast made for the Dow Jones or the ratio goes wrong, then the forecast for the Nifty calculated from the other two will also go wrong.
So it is important to keep the forecast time frame equal while doing an analysis using the ratio charts.
Here is an analysis on how the Nifty can perform against its global peers, going forward, based on ratio charts.
India vs the US
The Nifty/ Dow Jones ratio is currently at 0.48. It touched a low 0.43 earlier in October this year and is rising back from there. Strong support is around 0.42. The ratio can rise to 0.52 initially and then to 0.64 in a year or so.
The Dow Jones (52,347) has a strong resistance in the 55,000-56,000 region. We expect the index to remain below this resistance and fall to 46,000-45,500 in the coming months.
So, the rise to 0.64 in the Nifty/Dow Jones ratio and a fall to 46,000-45,500 on the Dow Jones gives us 29,120-29,440 for the Nifty. This rise in the Nifty can happen over the next one year.
Similarly, the Nifty/S&P 500 ratio is currently at 3.32. A strong support is around 2.78. The recent bounce is happening from just above this support. The ratio can rise to 4.58 from here.
The S&P 500 (7,562) has a strong resistance in the 8,100-8,350 region. The index can fall to 6,200.
If the S&P 500 falls to 6,200 and the ratio goes up to 4.58, then Nifty can go up to 28,396.
India vs Japan
Nifty/Nikkei 225 ratio has been in a strong downtrend since April last year. This downtrend is showing an early sign of a reversal. The price action since May this year indicates a double-bottom formation. This is a bullish pattern. The ratio is currently at 0.411. It can rise to 0.55.
Nikkei 225 (61,142) has made a bearish breakdown of its triangle pattern formed since May this year. This can keep the upside capped at 62,500. Nikkei 225 can fall to 52.000, going forward.
This possible fall to 52,000 on the Nikkei 225 and the rise to 0.55 on the ratio translates to 28,600 on the Nifty.
India vs Germany
Nifty/DAX ratio is currently at 0.94. The trend is down now. There is room to see 0.84 on the downside. After this fall, the ratio can rise back to 1.14.
DAX (26,750) is in strong uptrend. The index can rise to 30,000 in the coming months. After this rise, the index can see a downward reversal and fall to 24,500.
The initial rise to 30,000 on the DAX and the fall to 0.84 on the ratio gives us 25,500 for the Nifty. Thereafter when the ratio goes up to 1.14 and the DAX falls to 24,500, Nifty will get a value of 27,930 based on this trend.
Take away
The ratio analysis shows that Nifty has a chance to make a bullish breakout of its two-year-long sideways consolidation. Nifty has been broadly stuck between 22,000 and 26,500. From the ratio charts study above, we can expect the Nifty to breach 26,500 and go higher.
The ratio chart study also clearly indicates that the outperformance by the US so far is likely to come to an end. Based on the ratio analysis, we can expect the Nifty to outperform the Dow Jones and S&P 500 over the next one year.