The Indian markets bounced last week from support levels marked on our charts and zoomed to a resistance zone. If the resistance level is broken the Sensex may head to 19,300 and the Nifty can target 5700.
Both the indexes closed at resistance zones on Friday. Resistance levels are areas where the supply of stock far exceeds demand, leading to a fall in price. Support areas are the opposite, where demand exceeds supply leading to rally in price.
The resistance level where the indexes closed on Friday are around 18,730 for the Sensex and 5530 for the Nifty.
Let us take a look at the combined charts of Sensex and Nifty to get a better idea of the price action. (View Chart below) In our previous articles we had mention that if the green lines on the charts are broken the index would go all the way down the blue solid line. These lines have been on our charts for a few weeks and were published here earlier.
You will notice that, Sensex which is the stronger index as we mentioned earlier touched the support line and bounced. Nifty on the other hand went below the blue solid line down to the blue broken line and bounced. However, note that even the weaker Nifty did not close below the blue solid line, indicating that it was strong support with lots of buyers waiting to take a position once prices hit that level.
The levels indicated by the broken blue lines and the solid blue lines are gap support levels, which are area of extremely strong demand. That's why we saw the strong reversal from those levels.
The gaps are shown by white arrows on the chart. Gaps happen when the price closes at one level and then opens at a much higher or lower level the next trading day. If prices open higher the next trading it shows an area of demand and in case prices open lower it shows an area of supply. In the case of Nifty and Sensex you'll notice that prices hit the support gap level and bounced this week.
Now both indexes are close to resistance. If they have to go higher Sensex has to clear 18,730 and Nifty must clear 5530. Since the Sensex is stronger it is more likely to break out with strength than the Nifty. We say the 30-share index is stronger as it did not fall as low as Nifty did. The next level of resistance is up trending red line. This line provided support earlier and once it's broken turned to resistance. The next resistance levels are 19,300 for the Sensex and 5700 for the Nifty. These levels are marked by the two red lines on the chart.
Note that these two levels are also gaps to the downside and hence powerful supply zones. If the resistance levels that stopped the index of Friday are cleared it is likely that gaps could be hit. There are two reasons for that. One is gaps often act as magnets for price. The second reason is the way the markets fell 16 August. It was a huge clean drop. Once the resistance levels of 18,730 on Sensex and 5530 on Nifty are cleared, the indexes will enter the price range of the August 16 fall. Remember when prices fall huge and fast its because there are very few buyers and a lot of sellers. Now past buyers are future sellers and past sellers and shorters are future buyers.
So as prices enter that 16 August price zone past buyers who turn to sellers to get out without a loss are few. Past sellers/shorters are many in number and they turn to buyers. These two factors often result in huge price movements being retraced. Let us see what next week has to offer though.