For the last one year the Sensex has been forming ‘Lower Tops and ‘Lower Bottoms’ on the daily charts which is a very basic bearish ‘Dow’ signal in technical analysis. The second important point to be noticed is that for last entire year it is trading below the red dotted trend line drawn on the chart above which is a bearish indication.
The main trend of the Sensex is bearish, but intermediate rallies could take place. For the last few days HDFC Securities were expecting a rally as an important low was breached and whenever an important low is breached a rally has been witnessed over the last one year.
The last downward move was from 17,908 to 15,479 which took 16 trading sessions. The current upward move which is retracing this downfall, has today achieved 50% of this downfall (high for Dec 01, 2011 – 16,718) which was at 16,696 as marked on the chart above.
Generally, it has been observed that bear market rallies go up to 50% of the previous down fall and the maximum extent it can achieve will be 61.8% of the previous down fall which is at 16,893. On 28th October 2011, the Sensex opened with a huge gap, and for all the practical purposes, it was the top or rather from that top the Sensex came down almost vertically. So in any case, if the recent top made on 01st December 2011 which is at 16.718 is breached in the next 1-2 trading sessions, then 16,983 will be the next upward target, otherwise the similar situation what happened on 28th October will repeat. In such a case, the upward correction would end at 50% retracement.