Markets are near an area where demand for stocks exceeds supply.
The Bombay Stock Exchange benchmark Sensex and the National Stock Exchange’s Nifty have firmly established a downtrend since June 2011, but bears now face challenges as the markets are near an area where demand for stocks exceeds supply.
Both the indices have to clear several levels close to each other to continue the downtrend. Bears short from the November 2010 highs should take some profits and wait for rallies to short. Let’s take a step back and look at the market from a long-term perspective.
In our article, Markets at final frontier of resistance (November 8, 2010), we had mentioned that it was time for aggressive bears to take short positions. That was when the Sensex was near 21,000. In November, the markets were clearly giving bearish signal and it was time to stop going long, take profits on the long side and establish short positions. The markets sold off from that level and continued down.
On the way down, the Sensex and Nifty went into a bearish continuation chart pattern, called the symmetrical triangle. In our article, Sensex reloading for a 3,700 point charge (May 18, 2011), we had mentioned that the Sensex could fall as much as 3,700 points once it broke out of the triangle. Four weeks ago, the index broke below the triangle and based on the point of break, the Sensex could fall to as low as 13,650. The rationale for the target is explained in the May 18 article and is available on the website of Business Standard.
The fact that equity market will have challenges moving down was shown on Monday, with the market bounce. Last week, the Sensex reached a support area between 15,600 and 16,000. Additionally, copper had also been rallying since last Thursday. When copper rallies, the equity markets generally follow with a lag. The fact that the Sensex and Nifty sold off into a support level and copper was rallying were reasons for a rally in Indian equities. There is a key connection between copper and equities. Since copper is used in most manufacturing processes, a rise in copper prices indicates that the manufacturers are getting bullish on the economy. Hence the equity market reacts.
The other Sensex support levels lower are 15,360 and between 14,600 and 15,000. Once the 14,600 level is broken, the Sensex can fall all the way down to 13,650. Given that there are so many support levels, the bears may take some time to charge through. The Nifty bounced on Monday from a support level of 4,680 to 4,760. Its support levels below that are 4,540 and the zone between 4,355 and 4,460. Once that level is broken, it could fall all the way down to area between 3,930 and 4,015.
TRADING STRATEGY
Since the markets are bearish, we would wait for a rally to short into. The reason we state the markets are bearish is due to the fact that the 200-day simple moving average has begun to point down. Also, in July, both the Sensex and Nifty failed to break above the average, which shows the average is acting as resistance. Please check the charts nearby.
The areas where we would short are when the Nifty reaches the 5,030-5,080 range. The level above that is between 5,165 and 5,240. Similar levels on the Sensex are between 16,712 and 17,000 with the next level above being between 17,300 and 17,500.
The author is based in Chicago and is the editor of www.capturetrends.com
