The markets are retesting support after selloff from the resistance area, as predicted in our article last week. The support must be broken for the markets to fall further.
For Sensex, the support is in the 19,750 to 20,000 area, as shown by green horizontal lines in the chart nearby. Resistance is in the 20,850 to 21,200 area. For Nifty, the support range is 5,930-6,030 and the resistance range is 6,273-6,386. Both Sensex and Nifty have similar price action. Both been moving between support and resistance since late October this year. Unless these areas are broken, the broad market will not find direction.
The strength of the support area is in question as it has been hit quite a few times, which increases the possibility of a break. A support area is where the number of buyers exceeds the number of sellers. As prices come down, the buyers are absorbed, leading to sellers exceeding buyers. This leads to a break of the support area, turning all past buyers into future sellers.
The advantage for the bears is the selloff in the global markets on Friday, which could push the Indian markets lower. However, the bulls have a couple of advantages. First is that the 50-day moving average, as shown by the black up-sloping line, is in the support area. A moving average in a support area is a powerful confluence that can lead to a bounce.
On Thursday prices closed below the moving average (MA) which is bearish for the market. Since June, it is the first time the markets closed below 50-MA. The 50-MA on the Nifty is at 6,045 and the index closed at 5,988. On the Sensex the 50-MA was 20,101 and the index closed at 19,865. However, note that the indexes did not close below their support zone.
From a long-term perspective, it's not wise to be bullish as the markets are near all-time highs. Once the markets make a new high, it will be fine to turn bullish. Hence, right now one can be neutral or bearish. Bears, however, should wait for prices to rally into a resistance or break support before going short.
In case prices break support, one could go short till prices reach the next minor support level of 19,400. A break of that level can take the Sensex all the way down to 18,500.
The author is based in Chicago and is editor of www.capturetrends.com