Written for Business Standard
June 3, 2011: The bear hug of the Indian markets is tightening as more sectors continue to fall and trade below key bear threshold levels. The bearishness is seen on long term charts giving an indication that the downtrend can continue.

The charts now show that the Sensex, NIFTY and several sectors have topped and moved to the sell off phase. This is not only shown by price, but the 30-week simple moving average (SMA), which is a crucial tool used by investors form a bullish or bearish bias, when trading the four stages of the market. So let us list the factors investors use to make trading decisions.

To form a bearish bias the market has to:

• Move sideways after a rally
• Fall below the lowest price point in the sideways rally
• Trade below the 30-week SMA
• and finally the 30-week SMA must slope down

The reverse if true form a bullish bias.

A look at the broad market index and sectors show  the bearish bias firmly in place.

Sensex and NIFTY bearish

The Sensex and Nifty after peaking in November of last year went into consolidation. However, after the Sensex broke 19,000 and the NIFTY fell below 5700 the consolidation pattern was broken to the down side. The prices too moved above and below the 30-week SMA, but the average itself did not slope down till recently. Now the prices are below the 30-week SMA and SMA is sloping down indicating the that the broad markets have turned bearish.

The table below gives the status of the index and sectors in the Indian economy and provides links to the chart. The blue line on the  charts is the 30-week SMA:

 Trading Strategy

The strategy to invest using the four stages of the market is to stay bearish after prices move below the 30 week SMA and the average slopes down. Investors short the market whenever prices rally up to the 30-week moving average. On the other hand one can buy when prices are above an up sloping 30-week SMA and correct back to the average. Also steeper the slope greater the momentum of the trend. 

In the case of the Indian market most sectors are bearish, some neutral and just one bullish. One should focus on the bearish sectors to find areas to short. FMCG is bullish with both the SMA sloping up and price above it, but that does not mean one should buy into the sector. In a bearish market, it's best to ignore the bullish sector. Shorting the neutral sectors are fine too. In the case of consumer durables and health care, even though prices are above the SMA, the status is neutral as average is flat or sloping down. All the factors must be true to form a bullish or bearish bias.

Finally since most of the sector indexes are not traded on the futures market, one should look for bearish stocks within the sectors to short.