The Hindu Business Line : Momentum indicators signal a medium-term downtrend

Though, a correction has been long overdue, the ferocity of the fall has rattled most investors. The steepness of the fall can be attributed to the laborious manner in which the rally progressed since July with very shallow correction.

With most of the leveraged longs being added after the Sensex surpassed the previous peak at 12671, the scramble to exit these positions was one of the prime reasons exacerbating the fall.

The question that is uppermost on everyone's minds now is, has the market bottomed out. It is a little too soon to answer that question. But the fall on Tuesday has fractured the intermediate-term uptrend that has been in place since the low made on June 14.

The Sensex is positioned below its 50-day moving average.

An evening star is forming in the weekly candlestick chart of the Sensex. The momentum indicators in the daily charts are also signalling a medium-term downtrend. All these indicators are negative signals.

But the Sensex and the Nifty have halted near important support levels.

The 12795-level is 30 per cent retracement of the rise from 9875 in the Sensex. The corresponding level in the Nifty lies at 3697. The next support below Tuesday's lows lie at 12453 in the Sensex and 3607 in the Nifty.

Key support level

If the Sensex reverses above 12453 and the Nifty above 3607, it would mean that the bulls still have the chance to pull the indices back to a new high.

In other words, there is no reason to panic as long as the Sensex sustains above 12453 and the Nifty stays above 3607. However, a fall below 12453 in the Sensex would mean that it is heading towards 11468 and the Nifty is heading towards 3326.

It may be advisable not to make any fresh purchases if the Sensex falls below 12453.

Index resistance

The markets launched into a short-term rally on Wednesday. This rally has to take the Sensex above 13564 and the Nifty above 3898 before the short-term outlook turns neutral from negative. Inability on the part of the indices to overcome these levels in the next few days will be a sign of weakness and there will be the risk of the markets launching in to yet another downward moving leg.

Long-term investors can take heart from the fact that the long-term structural bull market in India is still intact. A fall below 11000 is required to make the long-term outlook for the Indian markets negative.

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