DOW NEAR PREVIOUS TOP....SENSEX BACK AT 73.6%...EXERCISE CAUTION!

The rally across the world has roasted the bears and made the non-participating bulls bite the dust. The Dow has not even given an intraday dip in the past week and is toying with its recent top made around 10700 in Jan 2010.The indicators, though strong, are getting overbought and are hinting at a pause if not a decline. 

The chart attached below also shows an uncanny resemblance to the rally which began around November 2009.Moreover the argument of the Bears has been the diminishing volume and the stretched fundamental valuations. But the volumes have shown some improvement in the past week.And as a technical analyst, my job is to react, not to predict.

A pullback can be expected anytime soon and should not be viewed a topping out formation unless the Dow breaks the 50EMA placed at 10400 odd.Till then, all is well :)

SOME INTERESTING OBSERVATIONS IN THE SENSEX 

The Sensex is back at its 73.6% Fibo levels. The Fibo levels of 38.2%, 50% and 61.8% are pretty well known in the market but there are certain derivations of the above which act as important supports or resistances.The Sensex in particular seems to respect the 73.6% Fibonacci retracement levels a lot.

Above is a chart of the entire Bull Run which began in 2003.The entire rally retraced upto 73.6% of the upmove. 

The above chart which shows the downmove ( Bear Market ) indicated that the Index also bounced back 73.6% of the entire fall and halted at 17700. We are back at the recent top along with Dow Jones. It would be a good move to trail the positions with tight stoplosses and not get in any fresh positions.

CONCLUSION : Avoid fresh positions, keep tight stoplosses on the current open positions and be ready for a pullback :)

Have a great trading day,

Regards,
Rahul T.