Sensex gaps down below 200-day EMA, ends "contraction", proves "Rule of 3"
Last week I had noted that, "contracting activity since 'Jan top is looking for a larger breakout now, probably in the coming week itself ... From that perspective, We'll watch out for a segment to get ‘fully’ retraced ... Complete retracement of the last contracting leg would prove a decider ... High & Low of the last leg were at 18137 and 17137 ... So watch both these levels in the coming week from the point of view of 'Rule of 3'... " Explaining the "Rule of 3" I said, "... Sensex (is) re-testing the crucial levels around its 200-day EMA ... it could be the last opportunity for the Index to prove if it is finally holding them or not ... Holding these supports on their 4th re-test is a difficult task going by the 'Rule of 3' ... Failure to trade above 17675-780 area or a 'close' below 17137, would confirm weakness for us." Global cues ensured Sensex' failure to trade above 17675, as a result of which, it slipped below 17137 on Monday itself. Once below 17137, end of "contraction" got confirmed as I specified, and just like an unwinding spring, Index tanked a huge 1600 points or nearly 11% by Friday. Small-Cap Index lost more, nearly 14%. Realty, Banking and Power Indices lost over 18%, 16% and 14%, respectively.Monday's action, in fact, showed a gap-down below the 200-day EMA. Friday saw another falling gap at 16211-253, both as marked on the chart. These are our new technical resistance on the upside. Some support came in at the lower Red channel shown. However, follow-up support "sustaining" above Friday’s high of 16211 is required to confirm this support. Failure to sustain above Friday's gap could not only lead to retest of Red channel, but would also see the Index reaching for Jan'08 low of 15332. Our final target on the downside, is calculated roughly as 14500. At this level, Index would lose 32% from its ‘Jan high of 21206. This would be a “normal” shave-off as per the 2-year phenomenon that I’ve already pointed out. The current down-move would complete the time equality (8 trading sessions) with the initial fall (from 21206 to 15332) on coming Tuesday. The 14500 level would also achieve 61.8% Fibonacci ratio to the 'Jan fall.
Last week's drop cuts the base-line for the 5-year long bull-market, and the participants are slowly realizing that. With its low at 15689, Sensex is just 357 points short of its 'Jan low of 15332.However, as we are moving closer to 14500, it may be a good strategy to buy in panics from hereon. This strategy may appear brave, and contrary to popular opinion, which is mainly the reason why it should work. Adopt a contrarian approach of searching for opportunities in panics, though only for a certain limited upside objective for the time being.
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I do not fully understand all the terms that have been used here, maybe a visual chart to support the written script could help better. Not withstanding, I do tend to believe that there is still some more downside left to be realised before the stability can be achieved and before genuine sentiment reversal can occur - people are still not ready to accept that the worst is over, the cracks in confidence levels seem still wide. So to that extent, 14500 levels are quite realistic and cannot be ignored. However, beyond that, it may take a fresh trading cycle with a couple of good bounce back rallies (with huge pull-backs and only limited or relatively insignificant downfalls/profit bookings) before the mood cheers up in the markets once again and the real upward momentum returns. Volumes will do a lot of talking from here on. Do look-out for which side are the greater volumes - on downfalls or on pull-up rallies, this will act as the most significant give away... cheers !!
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