(Written for Smart Investor)
November 29, 2010: The Sensex has fallen by nearly 2000 points in the past three weeks, a substantial fall, but nothing as shocking as the January 2008 plunge.

Also notice the 30-week moving average on the chart nearby shown by the red line. In 2008, the market completely ignored the moving average and broke below it. However, now the market is respecting the average. The average is used by long term investors to gauge the trend of the market. If prices are below the average and the average is sloping down, the trend is bearish. In a bullish trend, prices are above the average and and the average slopes up. The average also acts as support and resistance.

Medium term perspective

Both the Sensex and Nifty are below their 50-day exponential moving averages (EMA). They are however above their 200-day EMAs and it's possible for the indexes to consolidate between the two averages. Last Friday, the 50-day EMA on the Sensex was 19,869 and the 200 was at 18,408. The corresponding numbers on the NIFTY were 5976 and 5566.

Last Friday the markets also broke through a minor support area of 5850 on the NIFTY and 19,360 on the Sensex. These minor support areas did produce bounces, before being broken through. Now the next target on the NIFTY is 5560 and 18,500 on the Sensex. Below these levels, both the indexes have lots of support areas, making it difficult for the bears to push the markets down. 

For traders who entered the markets at their recent peaks, as we had recommended, should move their stops slightly above the 50-day EMA.  This will lock in their profits. We would continue to move stops down as the markets fall to seek how far the indexes can fall. Note that the indexes are falling from all time highs, which result in a substantial correction. Additionally, the markets are creating decent resistance zones on the way down, which will challenge the bulls on the way up.

Chart Analysis

Two bears