Written for Business Standard
February 2, 2011: Bears be cautious, Sensex and Nifty has reached a zone of support , which can lead to a pause in the sell off  or even a rally. The support zone on the Sensex is between 17,500 and 18,000.

The Senses chart is very interesting as it is reaching a classic pattern of resistance turning to support. Often times when markets break out of a resistance level, prices correct back to it and then bounce. The logic behind the price action is simple. Investors who missed the break out are jumping back in as prices pull back to the break out level.

The Sensex chart nearby ( Sensex at support ) shows how resistance turned to support. Notice that the Sensex hit resistance initially at the 18,000 level and sold off. Then prices rallied back up to it and broke out. A few days later prices sold off a bit touched the 18,000 level and then rocketed up to the 21,000 mark. Now prices have come back to the 18,000, which can act as support once again.

Remember that the markets are now in a medium term downtrend and any long trades should be short term. We say the markets are in a down trend as the Sensex is trading below its 50-day and 200-day moving averages. Also the index is making lower highs and lower lows. A lower high is when the latest high in prices is below the previous high and a lower low is when the latest low in price is lower than the previous low. A series of lower highs and lower lows shows a downtrend, as the Sensex is doing now. 

However, for the Sensex to go lower it has to fall below 17,500. If the destiny of the market is to go lower, we will see the index languish in the 17,500 to 18,000 range, weakening support and then falling. A break of support will take the index lower to the levels we mentioned earlier in the article. 

Now a lot of market experts will be voicing concerns of a bear market. They now talk about rising interest rates and inflation. However, the market had begun its decent in November way before these after the fact reasons emerged. If you recollect, we had mentioned in this article  on Novermber 8 that it was time to stop going long, book profits and initiate short positions. The time to turn bearish is when everybody else is bullish and prices are at resistance. Now prices are at support so one thing we will not do is short the market. The other two things one can do is go long with a stop below 17,500 or do nothing. We would go long with a stop below 17,500. More cautious players might wait for prices to move deeper into the support zone and then go long. Both strategies are fine as long as it's within risk parameters and the stop is in place.