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Therefore, immediate rallies will be interpreted as corrective in nature, unless the medium term technical parameters turn positive. The recent rally in the Sensex has been very sharp since the low of 12514 points. The upside gap of July 23, 2008 created a bullish ‘island reversal gap’ on the daily chart between 14510 PT and 14519 PT.
In general, its impact on the medium term outlook will be very positive, especially since the “Island” consisted of 22 trading sessions. When a stock indicates an uptrend that trades above the gap, then backs down the gap and trades below the opening price, an island reversal has occurred.
However, since then the Sensex has moved into a strong resistance zone between 15026 points and 15390 points. The monthly midpoint of June 2008 is 15026 points. The 50% retracement level of the decline from the May 2008 peak (17735 points) is 15124 points. If the daily closing price of the Sensex is below the 14104 mark (closed on July 22, 2008) then the positive effects of the bullish ‘Island Reversal Gap’ will end. Then Sensex expects an opening drop of 13513 points, 61.8% Fibonacci Retracement level recently increased from 12514 points to 15130 points.
If the bearish “Island Reversal Gap” of 14484-14568 points is filled immediately and Sensex manages to decisively overhaul the resistances between 15130 points and 15390 points, the ongoing bullish momentum will continue. Thereafter, Sensex may test higher levels between 16618 points and 16860 points.
The 78.6% Fibonacci retracement level of the decline from the May 2008 peak is 16618 points while the 16860 points is the 50% retracement level of the entire decline from the January 2008 peak. Hence, one has to wait for further confirmation before turning positive on the medium term outlook.
(The author is Vice President of Technical Research at Darshaw)
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