Capture Trends
Bull weakens but uptrend intact PDF Print E-mail
Written by George Albert   

(As published in India Infoline)
May 31, 2010: Market sentiment is generally predictable. When the market falls for a few days a majority get bearish and the opposite is true when prices rally. It is important to avoid the herd mentality to be successful in the stock markets.

In the past few articles we have mentioned market is turning bearish for a variety of reasons. Some of them include prices unable to break out of resistance, consolidation near resistance and the moving average turning flat. All these factors still hold true and the markets are building a bearish bias, but it has not turned into a bear market yet.

Let us look at the chart of the Sensex to illustrate our point. Notice that the uptrend channel on the Sensex is  still intact, which could mean that the market's fall in the past few weeks could just be a correction to the uptrend. A true bearish market is in play when prices make lower lows and lower highs. A look at the chart however shows that the Sensex is making higher highs (shown by the red arrows) and higher lows (shown by the green arrows). This clearly shows that the uptrend is not yet been broken.

For the market to turn bearish it has to break the lower trend line of the channel and also make a lower low and lower high. Once the market turns bearish there are still a lot of support areas that have to be broken through before the market goes deep into bear territory. The support areas marked by the blue lines can provide bounces or even reversals in the downtrend. Remember this point before we move on to a closely related topic. More the number of support areas, the more difficult it is for the markets to go down. And inversely, more the resistance areas, the more difficult it is for the markets to rally.

Now to the related topic. Why do we think that the market is building a bearish bias, while still in an uptrend? Apart from the factors discussed earlier in the article, the markets now have built a lot of resistance areas on its way down these past few days. Each of these resistances will be places where bears short when prices rally.

The resistance areas are shown with black arrows. Note that current fall has quite a few resistance areas, unlike the previous fall in January 2010, which was a clean drop. Such clean drops are usually low volume areas that leads to a quick retracement.

Remember in trading stay away from the herd, which gets bearish after a substantial fall in price and bullish after a substantial rise in price. Keep an eye on the charts and what the charts are telling you. Right now it tell us that bullish trend might be ending and that there are quite a few resistance areas to short into. It is also telling us to be cautious on the bull and take profits on long positions.

Chart Analysis

Sensex Channel