10-yr US treasury yields hold clue on where Nifty correction may end

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In our daily market previews, we have been warning since the end of July about the possibility of an imminent correction in stocks. On days when the domestic market was hitting new peaks, it was making itself vulnerable to bouts of volatile profit taking, as each upward move signalled over-extended technicals and over-stretched indicators.

The stock market did correct this week, and Friday’s low of 9,704 translated into the Niftycoming off over 430-odd points from its lifetime high. At a time when market participants have struggled to decipher how serious and deep this correction could be, a look at the US’ 10-year treasury yield throws up an interesting picture.

Historically, US’s 10-year treasury yields and Nifty have been negatively correlated. The correlation coefficient oscillates between -1 and +1. It is not a momentum oscillator, though.

Instead, it moves from periods of positive correlation to periods of negative correlation; where +1 is considered a perfect positive correlation, which is rare. Anything between 0 and +1 indicates that the two securities move in the same direction. The degree of positive correlation is likely to vary over time.

10-yr US treasury yields hold clue on where Nifty correction may end

Currently, two factors stand out in favour of the Nifty50 bottoming out at current level. The correlation between US’s 10-year treasury yields and the Nifty50 has become slightly positive over the past couple of days. Historically, this mild positive correlation has always peaked out at this level, only to turn negative from there on.

To complement this, the US’s 10-year bond yield has peaked at 2.62 and formed a double top. It has been making lower tops ever since and is on the verge of breaking down further from a symmetrical triangle that it has formed after forming a lower top. Any breach below the 2.20 mark will have a positive impact on the Nifty50 and make it least resilient to further downsides.

If the correlation, which is mildly positive now, starts turning negative – this has happened historically – and on top of it, if the yields show a downward breakout, they should have a positive impact on the Nifty50.

But if the Nifty50 holds the 9,700-9,770 base, it may have found temporary bottom at the current level. Any breach below 9,700 will see it head towards its 100-DMA level.

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