After trading in a very narrow daily range, the Sensex is back with some really volatile intra-day moves. The recovery from the low of 15,330 to 16,677 in five sessions was much sharper than the Sensex’s fall from the highs of 17,500 in 10 sessions. As always, the question that remains is, where does the index go from current levels? Although there is no one answer to this question, one can always look out for good support or resistance levels on the charts. One such technical tool that is extensively used to find supports and resistances is thegap In technical parlance, a gap is created when the stock, or any asset class, including the index, opens lower or higher than the previous day’s closing price and remains unfilled.
For example, the Sensex opening of 13,479 on May 18, 2009 after the election results, resulted in a huge bullish gap of 1,306 points above the close of 12,173 on May 15, 2009 which remains unfilled even after a period of almost six months.
Technically, gaps give good support and act as a good resistance point, as they are created by heavy buying and heavy selling. So, whenever markets, or a stock, move back to that point, traders and investors get active and the collective action of the participants works as a support or resistance, as the case may be.
On August 17, 2009, the benchmark index created a bearish gap in the range of 15,368— 15,284, which after four trading sessions on August 24 got filled with another gap. In technical parlance, a gap which is filled with another gap is called an island reversal and is considered an extremely important level for supports and resistances.
The Sensex has taken support at this level four times since it was created on August 24, 2009, There is one more gap that was created at 16,706 on October 27, 2009 which remains unfilled. The million-dollar question is: Which gap will be filled first? According to Shruti Vora, manager-technical research at Antique Stock Broking, “From a high of 17,493 on October 17, to a low of 15,330 on November 3, was the fastest downward retracement since the uptrend that started in March this year. In the process of this downward retracement, the Sensex created a falling gap (bearish gap) on October 27 at 16,706, which will act as a major resistance:’ There’s a higher probability that the index will fill the gap created on August 24 and test the 200-day EMA (exponential moving average) at around sub-15,000 levels on the Sensex and around 4,300 on the Nifty, she says.
However, Shrikant Chouhan, vice-president- technical research, Kotak Securities, has a different view. “The bullish island reversal gap was tested a few times and has given support to the markets. The probability is greater that the Sensex will fill the bearish gap and move higher’ Chouhan feels the Sensex should find a decent support at 16,160 (Nifty 4,800) levels, which is an important Fibonacci level as well.
Though the Sensex was not able to fill the bearish gap on November10, the broader indices such as the 8SF 100, 200 and 500 filled the gap, which does give some hope to the bulls. But then, some sectoral indices such as metal, realty and power indices could not fill the gap and are showing signs of weakness, and the BSE Small Cap is far away from filling the bearish gap. Of the Sensex 30 stocks, 14 stocks have completely or partially filled the gap which was created on May 18. Reliance Industries, RCom, DLF, Suzlon are few biggies in the list. It remains to be seen whether the benchmarkfollows these biggies and comes down to the May 14 level, or fills the gap on the upper side and moves higher to make another 52-week high.
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