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What is India up to?

|Includes: India Fund (IFN)
While all the talk has been about the Shanghai and its big rally for the year -- not as much has been written about the Indian stock market.  I am going to base the analysis here on the India Bombay Stock Exchange 30 Sensex index or $BSE. 

I find the Sensex a bit more interesting here because although the Shanghai and S&P 500 retraced exactly 38% of its last move so far, the Sensex has retraced 61.8%.  It has gone from 8k in March to 16k just recently before correcting and sitting over the 50% retrace at around 14.5k.

Over the weekend I posted on a global macro forum that the Sensex looks like it may have topped at the 61.8% retrace around 16k, with a huge gap to fill down to 12k.  The 200 dma is down near 11k.  I stated that it wasn't a time to be complacent, but was then told by top market analysts that droughts and swine flu didn't keep the Sensex from climbing.  Well whatever the reasons, there is a huge gap down there that is just begging to be filled when I glance at the chart. 
I also mentioned a big concern is that just filling the gap or touching the 200 dma would be larger than a 61.8% retrace (corresponds to 38.2% on chart or ~13k) so that sets us up for a retest of the lows if not lower.  Let's analyze a condensed chart.

The numbers are a bit hard to see, but the 61.8% retrace at the 16k level was hit and has been acting as resistance.  If it punches higher than we are very likely to get to the highs at 21k.  However, regardless of how hot markets are, they usually come down to touch their 200 dma at some point.  Same thing with gaps, they usually get filled at some point.  It looks like back in July the Sensex was trying to do just that but everything got aborted and all markets soared.  Technically, that is an unfortunate event because now to fill the gap requires falling below the 38% retrace in the upper 12k.  That puts a retest of the lows back on the table. 

Of course, this is just the most likely scenario based on current data and no one or model can predict with certainty any event -- just not a time to be complacent and to trade with technicals and serious risk management.

I trade the Sensex via IFN, and my models gave me a sell signal August 10th.

Disclosure:  No positions in securities mentioned in this post