Written for Business Standard
August 31, 2011: The Bombay Stock Exchange benchmark Sensex and the National Stock Exchange’s Nifty have firmly established a downtrend since June 2011, but bears now face challenges as the markets are near an area where demand for stocks exceeds supply.

In our article dated November 8, 2010 (Click here for article) we had mentioned that it was time for aggressive bears to take short positions. That was when the Sensex was near 21,000. In November the markets were clearly giving bearish signal and it was time to stop going long, take profits on the long side and establish short positions. The markets sold off from that level and continued down.

On the way down the Sensex and NIFTY went into a bearish continuation chart pattern called the symmetrical triangle. In our article dated May 18, 2011 (Click here for article) we had mentioned that the Sensex can fall as much as 3700 points once it breaks out of the triangle. Four weeks ago the index broke below the triangle and based on the point of break, the Sensex could fall to as low as 13,650. The rationale for the target is explained in the May 18 article and is available on the Business Standard website.

The fact that equity market will have challenges moving down was shown on Monday with the market bounce. Last week the Sensex reached a support area between 15,600 and 16,000. Additionally, copper was also rallying since last Thursday. Whenever copper rallies, the equity markets generally follow with a lag. The fact that Sensex and NIFTY sold off into a support level and copper was rallying, gave two reasons for a rally in Indian equities. There is key connection between copper and equities. Since copper is used in most manufacturing processes, a rise in copper prices indicate that the manufacturers are getting bullish on the economy. Hence the equity market reacts.

The other Sensex support levels lower are 15,360 and also between 14,600 & 15,000. Once the 14,600 level is broken the Sensex can fall all the way down to 13,650. Given that there are so many support levels, the bears may take some time to charge through. The NIFTY bounced on Monday from a support level of 4680 to 4760. NIFTY's support levels below that are 4540 and the zone between 4355 and 4460. Once that level is broken the NIFTY can fall all the way down to area between 3930 and 4015.

Trading strategy

Since the markets are bearish, we'd wait for a rally to short into. The reason we state the markets are bearish is due to the fact that the 200 day simple moving average has begun pointing down. Also in July both the Sensex and NIFTY failed to break above the average, which shows that the average is acting as resistance. Please check the  Sensex Chart and  Nifty chart for more details

The areas where we'd short is when the NIFTY reaches the range between 5030 and 5080. The level above that is between 5165 and 5240. Similar levels on the Sensex are between 16712 & 17,000 with the next level above being between 17,300 & 17,500.