After touching a high of 20204 on Jan 29 ‘13, the Sensex formed a ‘reversal day’ pattern and started on a down trend (marked by the blue line). Trends remain in force till they are broken. The index needs to move above the blue down trend line convincingly for the bull market to resume its up move.
Note that the index dropped below the 19000 level in early-Mar ‘13, but received good support from the 200 day EMA and bounced up all the way towards the 19800 level. It touched a lower top of 19755, and resumed its down move. By end-Mar ‘13, Sensex slipped below its 200 day EMA to touch a lower bottom – forming a bearish pattern of ‘lower tops and lower bottoms’.
The subsequent bounce faced twin resistance from the falling 20 day EMA and the 19000 level. Is the bull market over? Not yet. That doesn’t mean the index won’t fall more. Bearish daily technical indicators are suggesting a continuation of the down move.
The ‘gap’ between 18060 and 18290 - formed back in Sep ‘12 – is likely to provide support on the downside. Note what happened in Nov ‘12. Even if the ‘gap’ gets filled, Sensex should resume its up move subsequently.
Nifty is following in the footsteps of Sensex. Strong volumes on down-days is an indication that the correction isn’t over. Daily technical indicators are bearish, but hovering near their oversold zones – so a further up move can’t be ruled out.
The ‘gap’ between 5450 and 5525 – formed back in Sep ‘12 – was filled by the ‘flash crash’ on Oct 5 ‘12. However, since it was caused by an ‘error trade’ and is not visible on the Sensex chart, the ‘flash crash’ will be ignored for the purposes of technical analysis. In other words, the ‘gap’ will be treated as ‘unfilled’.
Till the ‘gap’ gets filled, Nifty may consolidate sideways with a downward bias – with the blue uptrend line providing upside resistance and the ‘gap’ providing downside support.