Written by our editor for Smart Investor
November 21, 2010: The Sensex and Nifty broke crucial support on Friday after hitting it about three times in the past few days. Both indexes also closed below their 50-day exponential moving average, which is bad news for the bulls.

The fall in the indexes over the past few days will now prompt a lot of players to short in anticipation of a further fall. We never recommend chasing the market as the odds of a bounce now  has increased, given the sharp sell off. As mentioned in our earlier articles, the right place to short the markets were when they touched their all time highs a few days back. This was a low risk entry as one could have a stop a little above the all time highs.

Now let's look ahead. On Friday the Sensex hit a minor support zone at the 19,400 area and bounced. We had identified this area in last week's column. The index must close below 19,380 for a further drop in the market. After the 19,380 break, the Sensex can go all the way down to 18,500. On the Nifty the minor support area is at the 5850 area and a close below 5800 can take the index all the way down to 5560.

The 50-day exponential moving average too is giving a bearish signal. Prices closed below the moving average for the first time since June 2010. Also the average is sloping down.

Trading strategy

Traders who shorted the market based on our call should now cover a portion of their position and book profits.  Stops on the rest of the position should now be moved on the Sensex to 20,400 level and the 6156 level on the Nifty. Traders not in a short position should wait for a rally to short. For the Sensex the level to short would be 20,175 with a stop at 20,400 and for Nifty the level would be 6072 with a stop at 6156.

Chart Analysis

  Sensex breaks support