Aftermath of the Japanese Earthquake

2 weeks had pasted after the Japan earthquake incident. Its nuclear reactor situation is under control but its radiation leaks are starting to worsen. The Japanese victims are surprisingly calm and starting to rebuild and restart their normal lifestyle. Parts of Japan economy had a standstill but is slowly reviving again. However, over the weeks, numerous manufacturers were scrambling around like ants on the hot pans to look for Japanese produced parts for their manufacturing process. Launch of Ipad 2 to other countries were scheduled for delays. The earthquake’s impact still carry on to date and people are still handling the aftermath of the earthquake. How does the markets react to this aftermath? Will the world economy be derailed just because of this earthquake?

I doubt the impact is that great. Let’s look into the charts.

Trend: Downtrend, 20ma flatten, MacD below 0

Support: 2970, 2920 (Recent low), 2880

Resistance: 3060 – 3070 (200ma + Falling window), 3120 (Recent high), 3180 (100ma)

Observations:
Candlestick – White candle closed exactly at 200ma.
Histogram – 5Gs. Clear bullish divergence is seen.
RSI – Around 50%. Clear bullish divergence is seen.
Stochastic – Bearish crossover is about to be formed. Overbought.
Bollinger Band – Price trading in between upper band and mid band.

Conclusion:
STI managed to break above 20ma last week and this bullish movement had caused 20ma to start its directional change, hence, the STI might have a change in trend. However, STI closed exactly at 200ma on last Friday and slightly higher than the gap resistance of 3070 level, which we can still assume that STI is trading at resistance level. Despite such bullish movement, STI still remains as a downtrend as it had recently made a lower low when it broke 2970 support level and bounce off from 2920 support level.

Since STI had made a lower low formation recently, it is likely to form a lower high after a lower low. Hence, at current resistance level of 3060 – 3070, if STI is to start to form a bearish reversal formation at this level, STI would likely to form a lower high as the previous high is at 3120 level. If STI is to trade lower than 3060 and 20ma this week, this would have a very strong indication that STI would carry on to go for a lower low. Perhaps, it could be heading lower than the previous low of 2920 level. If that is to happen, the major support for STI would stand at 2880 level where a possible lower low could be formed.

On the other hand, if STI decides to be very bullish and goes against the bearish trend, it might have a chance of breaking this strong resistance of 3060 – 3070 and head towards the next major resistance of 3120 level. If STI is to test 3120 level, it would mean that the trend might no longer be downtrend anymore. STI’s trend could be turning sideways or even uptrend if 3120 level is broken. Uptrend would only be confirmed if a higher high is formed at resistance level and a higher low is formed at support level. Hence, the likely level for a higher high to be formed would be 3180 level. However, this kind of bullish movement would be an uphill task for the market which is in the midst of bearish situation.

Looking at indicators and candles formation, it seems that the short term indicators are indicating that this recent bullish movement is starting to get weaker and weaker. Stochastic which is overbought is starting to narrow for a bearish crossover soon. However, on the positive expects, there are very clear bullish divergence signal forming at those 3 indicators that we should not ignore. STI might have a good chance of a trend reversal soon.

In conclusion, in short term, we might see STI to show weakness towards the bullish side for the upcoming few days. However, due to the clear bullish divergence signal, STI might have a strong chance to start reversing its downtrend to uptrend in upcoming days to weeks. A trend reversal can be identified with either a higher high formation or a higher low formation. I would expect a higher low formation chance as the short term indicators are poise towards the bearish side for this few days. Hence, if STI is to retrace this week and fail to trade lower than 2970 support level. There would be a possibility of a higher low formation. Confirmation of uptrend would happen if STI breaks 3120 resistance level. The expectation of uptrend formation would vanish if STI is to test 2920 level again. Therefore, I would be watching how the market would play out this coming few days and most importantly watch out the market reacts at 2970 level.

What to watch out for this week:
1) Testing of 2970 support level.
2) Breaking of 3070 resistance level.
3) Testing of 2920 support level.

Trading strategy to adapt right now:
- Short position can be initiated if bearish reversal candle is formed at 3060 – 3070 level. But must be quick to take profit at 2970 level due to bullish divergence signal.
- If bullish reversal candle is formed at 2970 level, can look for stocks to long but cautiously.
- Trade breakout on the long side if 3120 level is breached with high volume.

*Disclaimer:
This analysis is provided to you for general information only and does not constitute a recommendation, an offer or solicitation to purchase or sell the product mentioned. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of you acting based on this information. Investments are subject to investment risks.
Please consult your respective advisers.