Is the Sensex correction over already or, are the bears just getting warmed up?

In last Tuesday's analysis of the downward break out of the BSE Sensex index from a bearish descending triangle formation, I had made the following observations:

1. The twin combination of a descending triangle at a market top and good volumes on the downward break out from the triangle suggests more correction ahead.
2. Any pull back in the next few days is likely to face resistance from the pierced 50 day EMA and the 17400 level, as bears will use the pull back to sell.
3. If you had not booked any profits in the hope of higher Sensex targets, the likely pull back may be a good time to take some money off the table.

I am not in the prophecy business. If you have been through enough bull and bear market cycles, you start to get a feel of how Mr Market is going to behave at critical market levels. And some times Mr Market humours you by doing exactly what you expect.

A look at the 1 year closing chart pattern of the BSE Sensex index shows an almost text book example of a descending triangle break out followed by a pull back:

The downward correction continued for the rest of last week, closing at 16769 on Friday (May 7 '10) for a near 800 points (4.5%) lower close on a weekly basis. Some times, an overbought market waits for a trigger - any trigger - to start falling. This time it just happened to be Greece.

Monday's (May 10 '10) sharp pull back should have come as no surprise to readers of this blog. Hope at least some of you used the opportunity to book profits (or get rid of non-performers). Despite the huge 560 points move, the Sensex faced resistance from the 50 day MA (which was just below the 17400 level).

Bears resorted to selling today - again no real surprises there. A longer-term support line at 16700 has been drawn. It is possible that the Sensex may spend some time between 16700 and 17400 before deciding its next move. Any upward rallies will have another resistance point - the downward sloping trend line of the descending triangle.

The technical indicators are still bearish, which means the correction is not over yet. The MACD is negative and below the signal line. The RSI tried to move up to the 50% level but failed and turned down. The %K line of the slow stochastic edged above the 50% level, only to drop below.

Technically, the long-term bull market is in tact and will remain so as long as the two previous lows of Feb '10 and Nov '09 (in the 15300-15700 band) hold.

In seven trading sessions in May '10 so far, the FIIs have been net sellers to the tune of nearly Rs 4000 Crores. The DIIs have net bought a bit more than Rs 1200 Crores while retail investors have net bought worth Rs 540 Crores. Now you know the real reason for the Sensex correction!