Therefore, immediate rallies would be interpreted as corrective in nature until the mid-term technicals turn positive. The recent growth in Sensex since the low of 12514 points is very evident. The bullish gap on July 23, 2008 created a bullish reversal gap on the daily chart from 14510 points to 14519 points.
Normally, the impact of this on the medium-term outlook would be very positive, especially as the Island consists of 22 trading sessions. When a stock shows an uptrend, trading above the gap occurs, then decreases the gap down and trades below the original price, a reversal has occurred.
However, Sensex has since fallen into a strong resistance zone between 15026 points and 15390 points. The mid-month score for June 2008 was 15026 points. The 50% retracement of the decline from the May 2008 peak (17735 points) is 15124 points. Thus, the positive effects of the “Reverse Gap” would be negated if Sensex had a daily close below 14104 points (closed on 22 July 2008). Sensex is then expected to have an initial drop of 13513 points, the 61.8% Fibonacci retracement of the recent rise from 12514 points to 15130 points.
If the bearish Island reversal gap of 14484-14568 points is immediately filled and Sensex manages to definitively overhaul the resistance levels between 15130 points and 15390 points, the ongoing uptrend will continue. . Sensex can then test higher levels between 16618 points and 16860 points.
The 78.6% Fibonacci retracement of the drop from the May 2008 peak is 16618 points while 16860 is the 50% retracement of the entire fall since the January 2008 peak. one would wait for further confirmation before turning positive on the medium-term outlook.
(The author is Vice President of Engineering Research at Darashaw)