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Markets may test recent highs in case support holds PDF Print E-mail
Written by George Albert   

(Written by our editor for Smart Investor)
October 25, 2010: NIFTY and Sensex bounced from support last week and must break the support level to go lower. An inability to break below support can result in the markets testing its most recent highs.

On Friday both the Sensex and Nifty closed in what we call a no trade zone. That's so as the indexes were not near any kind of support or resistance area and could go either way. On the NIFTY, bulls should wait for the index to come down to the 5950 area before going long. Bears on the other hand should hold off till the NIFTY reaches the 6250 area. Support on the Sensex is in the 19800 area and resistance in the 20,900 area. Till prices reach these areas we'd do nothing.

A look at the NIFTY chart below will show the reason for bounce last week.  Sensex has a similar price action. The support area that resulted in the bounce of the NIFTY is marked by a blue box. The index consolidated in that area for a few days and then rallied showing that demand exceeded supply at that level. For prices to move lower the demand in that area has to be absorbed.

Also note that the Commodity Channel Index (CCI) on the NIFTY too hit the oversold area at negative 100 and bounced. The CCI then hit the zero level on Friday and reversed. 

Note that the NIFTY went deep into the support level shown by the blue box, indicating that a lot of the demand has been absorbed. The more times the support level is hit greater the chance of the index breaking down. The market has rallied substantially and prices are near a very strong resistance area--the all time high of the index. Hence this is not a place to go long except for day trades. For the medium term, it's best to maintain a bearish bias. We would give up the bearish bias only if prices break out to a new all time high.

Once the support area of NIFTY is broken it has minor support at the 5800 area. After that level the next support area is only in the 5500 area.  In the case of the Sensex if the current support is broken, the next support level is at 19,380 followed by 18,500.

Chart Analysis

Nifty Chart