Thursday, May 6, 2010

When and where will the Sensex stop its fall?

There are two kinds of investors - those who sell near a Sensex top and those who buy near a Sensex top. The former lot has been sitting on a pile of cash waiting for a good correction to buy. The latter group, who bought from the former, is desperate to get back the 'buy' price.

The Sensex neither keeps track nor cares about who bought and who sold, and at what price. However, the buyers and sellers always remember the prices and levels where they bought or sold. That gives rise to longer term support and resistance levels.

Since the question must be playing in the minds of both groups of investors - those who sold and want to get back in, and those who bought and wish to find the nearest exit door - I have drawn a few longer term support-resistance lines on the Sensex chart pattern:


The chart is looking a bit cluttered due to the proximity of the support-resistance lines - but the levels are approximately at 17500, 16000, 15500, 15100, 14200, 13200.

There is nothing sacrosanct about the levels. Technical analysis is more art than science. I have chosen these levels because they seem to have the maximum number of support and resistance points on them.

17500 was the top in Oct '09, after which the Sensex didn't move up much - making highs of 17790 in Jan '10 and 18050 in Apr '10. The 16000-16500 band is expected to be a strong support level to the current fall. (I had mentioned about the 16500 level in last Tuesday's post.) In case that level is broken, there is another long-term band of support between 15100-15500.

A bigger correction will provide excellent buying opportunities to the bulls. The next two levels are much lower at 14200 and then down to last July's gap area low at 13200. I am not saying the Sensex will fall that far. A lot depends on how the Eurozone economic problems pan out.

What about the pullback I mentioned on Tuesday? There were intra-day pullbacks on May 5 and 6 - as the Sensex closed well above its intra-day lows. Friday's trade should see more shorts getting covered and I won't be surprised if the Sensex closes in the green after 4 straight down days.

I have answered the 'where'. What about the 'when'? That's a good question. With most Q4 results already announced, the next trigger for the market will be the audited results of some of the big companies that didn't announce their unaudited results. And of course, the onset of monsoon. That puts the time around end-May to early-June.

Till then, there are no reasons for the Sensex to move up too much. Neither is a crash expected. More like a downward drift. Why? The FII's have sold heavily the past two days, but the DIIs have bought. A sharp fall in the Sensex would be disastrous for the PSU IPOs and FPOs in the pipeline.

If the FII selling slows down or they start buying again, the Sensex may start to rise. On any up move, expect resistance from the 50 day EMA and the 17400 level.


Sam said...

When i first read your blog i found it very interesting.. and more often i visit it, more impressed i get.. Sir.. you are doing a fabulous job.. Keep it up!!

Subhankar said...

Thanks for your comments, and kind words, Mansoor.

Prem Lulla said...

Very helpful and analytical analysis indeed . Please keep posting such clear analysis of the long term trends as definitely many of small investors like me will be benefitted, thanks

Subhankar said...

Thanks for your comments, and kind words.

Joe said...

Dear Sir,

Your comments are easily understandable to the Aam Admi with basic understanding of English. Thanks for making comments which are useful to the common man.

Subhankar said...

Appreciate your comments, Joe.