Broad markets break out of resistance
The broad markets broke out of resistance with strength last Friday and seem headed to the last resistance areas, before making all time highs.
The Sensex and Nifty paused at their resistance zones, identified in the previous columns, for about two weeks and finally broke out. The resistance area on the Sensex was in the 20,000 to 20,300 area and on the Nifty it was the 6075 area. After these area were cleared last Friday, the next resistance zone which encompasses the previous all time high, is between 20,900 and 21,250 for the Sensex and 6190 and 6400 for the NIFTY.
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The blast off from resistance zone was a strong one as the markets rallied without making a lower low. Both the Sensex and Nifty paused when they hit resistance moved side ways and rallied. In a market that is not extremely strong, bull runs often meet with a sell off before the next leg up. The price action indicates that the markets are headed to their all time highs as we had pointed out a few weeks back.
This is, however, not the time to go long as the markets are reaching their all time highs. The basic principle in any market is to buy low and sell high. By going long right now, buyers will be buying high, increasing the probability of a loss.
The rally in price does not come as a surprise to veteran traders. After the markets rallied in early September breaking out of resistance a lot of people feared they had missed out and rushed to buy. This increases the strength of the rally. Additionally, the markets were in a vacuum zone, as we had mentioned in the previous articles, which sucks up price. This is so as there are no strong resistance areas in vacuum zones.
The strategy right now would be book profits on long positions and establish short positions at the next resistance zone. The markets are in extremely high overbought areas as indicated by the Commodity Channel Index (CCI). A CCI reading above 100 is considered overbought, and the NIFTY closed last Friday at 201 and the Sensex at 219. Interestingly, the high on the CCI, when the markets were peaking in 2008 was 243 on the NIFTY and 235 on the Sensex. This shows that the markets may have some more to rally, but the risks are extremely high.