Intermediate reversal above 13872

Technical Analyst, Hitendra Vasudeo:

Last week we had indicated weakness in the market and the same was witnessed as the Sensex fell to a low of 12822.

The Sensex opened last week at 13791.02 attained a high at 13872.06 and fell to a low of 12822.75 to close the week at 13454 and thereby showed a net fall on 320 points on a week-to-week basis.

Our expected range on the lower side was 12671-12344 against which we have seen Sensex attaining low of 12822. The weekly pivot was placed at 12739 as well.

The Sensex showed a good recovery on Wednesday, 2 July 2008, when it recovered from low of 12822 to close at 13664. The high registered the same day was 13712. On Thursday, we found that high level of 13712 was not to be seen as the market opened gap down on Thursday to close lower but it did not violate 12822. On Friday, it bounced back without violating the low of Thursday. For this week, the resistances will be at 13712 and last week’s high of 13872. 

The Sensex will now have to cross and close above 13872 in order to confirm the low of 12822 as the intermediate bottom and also to end one leg of the corrective cycle. The next leg of the corrective cycle could be up for an overall pull-back of the fall from 21206 to 12822.  For this to happen, a breakout and weekly close above 13872 is required.

A fall and close below 12822 will take the Sensex to test the down range of 12671-12344 and could even violate it. The Sensex must, therefore, cross and close the week above 13872. We may also find some kind of sideway moves between 13872 -12822.

Observation:

Using Andrew’s Pitchfork technique, taken from the top of 21206, 14677 and 17735, we find that the centre trend line support was witnessed in the market last week. It recovered from the centre line of the downward channeled move. As it has taken support of the centre line and if it does not violate it, then we could find the resistance of 13782 getting crossed. Later, we could find price move towards the upper channel line. If it fails to sustain and cracks the centre line, then expect a slide down towards the lower channel line.

If we take the 1.27 downside retracements by considering the points 21206, 14677 and 17735, then the ratio level is placed at 10853. The 1.618 level would be at 8967.

Therefore, it is equally important for the market to sustain at the current level and move up.  If this time, we see violation of 12822 then it will not only test 12671-12344 but could also violate it and move down further towards 10853. The Sensex has some leverage of 12671-12344 which can act as a buffer.

Conclusion

If the low of 12822 is not violated and we cross and close above 13872, then we are likely to terminate one leg of the corrective cycle. The next leg of the corrective cycle  can be for an upward bias.

Strategy for the week

For the time being, cut short positions at current level and on dip to 12822 as the opportunity arises. Sell further on fall and close below 12822 with the high of the week as stop loss or 13872, whichever is higher at the point of breakdown.