Bears be cautious, the Sensex and Nifty have reached a zone of support, which can lead to a pause in the sell-off or even a rally. The support zone on the Sensex is between 17,500 and 18,000.
On the Nifty, the range is between 5,425 and 5,374. The structure of support on the Nifty is slightly different from the Sensex. On the Sensex, a break-off at 17,500 can take the index down 1,000 points to 16,500, and below that the support level is at 16,000. Nifty on the other hand, has its next support level pretty close by at 5,250, followed by 4,980 and 4,800. Prices often turn higher from the support levels and fall from the resistance levels.
The Sensex chart is very interesting, as it is reaching a classic pattern of resistance turning to support. Often times when the markets break-out of a resistance level, prices correct back to it and then bounce. The logic behind the price action is simple: Investors who missed the break-out are jumping back in as the prices pull-back to the break-out level.
The Sensex chart shows how the resistance turned to support. Notice that the Sensex hit resistance initially at the 18,000-level and sold off. Then prices rallied back up to it and broke out. A few days later prices sold-off a bit, touched the 18,000 level and then rocketed up to the 21,000 mark. Now, prices have come back to 18,000, which can act as a support once again.
Remember the markets are now in a medium-term downtrend and any long trades should be short term. We say the markets are in a downtrend as the Sensex is trading below its 50-day and 200-day moving averages. Also, the index is making lower highs and lower lows. A lower high is when the latest high in prices is below the previous high and a lower low is when the latest low in price is lower than the previous low. A series of lower highs and lower lows show a downtrend, as the Sensex is doing now.
However, for the Sensex to go lower it has to fall below 17,500. If the destiny of the market is to go lower, we will see the index languish in the 17,500-18,000 range, weakening support and then falling. A break-off support will take the index lower to the levels mentioned above.
Now a lot of market experts will be voicing concerns of a bear market. They talk about rising interest rates and inflation. However, the markets had begun its descent in November; way before these after-the-fact reasons emerged. We had mentioned in our article on November 8, 2010 (http://www.smartinvestor.in/market/technicals-48112-technicalsdet-Markets_at_final_frontier_of_resistance.htm) that it was time to stop going long, book profits and initiate short positions. The time to turn bearish is when everybody else is bullish and prices are at resistance. Now, prices are at support. So, one thing we will not do is short the markets. The other two things one can do are go long with a stop below 17,500 or do nothing. We will go long with a stop below 17,500. More cautious players might wait for prices to move deeper into the support zone and then go long. Both strategies are fine, as long as it’s within risk parameters and stops are in place.
The author is based in Chicago and is editor of www.capturetrends.com
