Uncertain Market is Brewing

Concerns of falling oil prices and commodities price continued to loom the market during last week. Our expectation of a post election rebound did happen but the market seems to be unable to hold on to the gains on Thursday and came crashing down. However, on Friday, things seems to be positive again as the market rebounded strongly again. Things might turn bearish this week due to the overnight drop in DJI on Friday. Furthermore, STI is going to have a short week this week where Tuesday would be the Vesak day holiday. Traders might be unwilling to commit positions for Monday. Would the market stay bearish this week? Had the downtrend been formed?

Let’s get the answer from the chart.

Trend: Bearish Sideways, 20ma slightly down, MacD above 0

Support: 3120 (50, 100 & 200ma) 3080, 3040

Resistance: 3180, 3200

Observations:
Candlestick – White candle with long lower shadow.
Histogram – 1G only. Bearish divergence is seen
RSI – Around 50%. No clear bearish divergence.
Stochastic – Around 80%. Bearish crossover is seen.
Bollinger Band – At the mid of the band. Band is still narrow.

Conclusion:
STI is now above 3120 yet again this week. Its Friday’s closing had placed STI to be above all the MA lines and all the MA lines are getting very close to one another. This is a scenario where the market is doing a sideways movement and is consolidating for a significant movement going forward. The only problem is that it is hard to identify which direction would it breakout; Up or Down, it is everyone’s guess. As there is a slightly lower low being formed, it seems that there is a higher chance for the downside.

As noted last week, 3180 is a possible level where STI could form a lower high so that it can confirm the formation of a downtrend. Based on last week’s price action, it seems that a lower high could be formed, but Friday’s price action did not confirm the lower high formation as buyer sets in to snap up stocks on bargain hunting. These market actions might indicate that the market is still trying hard to find its clear direction. In order to confirm the downtrend, 3120 would be the crucial point as there are multiple confluences of the MA lines. 50ma would be the last line of defence for the bullish side, currently; it is trading at 3110 level. Breaking of this level would indicate that STI is going for a downtrend. On the upside, STI have to break 3180 level before we can start to skew our readings to the bullish side.

The only best readings we can achieve for now is from the indicators. The candle formed on Friday shows that STI is refusing to break the MA as support. This gave the STI some boost in the short term bullishness. However, the stochastic starts to trigger a bearish crossover which could indicate that the bearish movement is likely to be seen for this week. The rest of indicators did not derive any meaningful readings and therefore it is hard to derive any clear conclusion. These conflicting readings could mean that the market is going on a sideways movement.

In conclusion, the STI might still be trying to form a lower high formation for this week. There is still no clear sign that the lower high is being confirmed. Although the chances are pretty high, more confirmation from the price action is needed. I would only be very sure of whether the trend is a downtrend only when STI breaks the 50ma line which is currently at 3100 level. 100% confirmation would happen only when STI breaks 3080 level where a lower low would sure be formed. As there aren’t any clear readings from the indicators, it would be likely that sideways movement would happen this week. The trading range for this week could be between 3100 – 3180 this week. Breaking of 3100 or 3180 levels would mean a clearer direction would be formed.

Traders should therefore be really cautious this week as there are a lot of uncertainties in the trend reading. Odds are still more towards the bearish side, but it seems that the downside is getting very limited for this week. More downside would come only when 3080 breaks. Long traders would like to make use of the early week to close off their counter trend long position which they could have established early in the week. Shortist might have already entered the market during the end of last week. Therefore, it might be a little late to enter the shorting game for now, unless there is a good shorting setup with good risk reward.

What to watch out for this week:
1) Breaking of 3100 support level.
2) Breaking of 3080 support level.
3) Breaking of 3180 resistance level.

Trading strategy to adapt right now:
- Close counter trend long position if there is
- Short positions can be initiated only if there is good risk reward and setups
- Close half short positions when support level is reached.

*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.