Downtrend confirmed but short term rebound to be expected

The worst case scenario for STI might be happening after STI failed to hold at 3040 level last week. This created fears in the market as traders start to flee the market and even turned into short positions last week. The sell down was triggered by weak performance by DJI and HIS last week as they too broke their key support levels. On top of that, weak economic data are announced last week stimulated further selloff. With such a sharp drop, many were worried about how low can it go and wonder where the bottom is.

Let’s get the answer from the chart.

Trend: Downtrend, 20ma down, MacD below 0

Support: 3000 (Psychological level), 2960, 2920

Resistance: 3040, 3080, 3120

Observations:
Candlestick – Long black candle with little lower shadow.
Histogram – Many Rs. No divergence.
RSI – Around 20%. Oversold. No divergence.
Stochastic – Around 18%. Oversold. Bearish crossover in oversold.
Bollinger Band – Out of lower band. Band still opening up.

Conclusion:
STI broke another possible support level of 3040 last week. This had weakened the bulls and forced the bulls to retreat as the bears gain the advantage after 3040 level breaks. This movement implies that STI would be heading towards the psychological support level of 3000 which STI closes near that level for the week. As it is now trading at its psychological support level of 3000, there could be a possibility that STI might for a lower low formation here. If the support level of 3000 fails to hold, STI would be heading lower and towards 2960 support level.

The short term indicators are still on the bearish side and yet to show signs of bullish reversal yet. The opening up of Bollinger band could signify that STI’s bearishness could continue as the volatility is getting stronger. However, it is good to note that both RSI and Stochastic are now in the oversold region and that might indicate that chances of rebound is getting higher. As there are still no sign of white candle formation to trigger the rebound on last Friday, it would be hard to conclude that a rebound would be possible for next week. Hence, a bullish reversal candle is lacking right now at 3000 psychological support level.

If, STI manages to form a bullish reversal candle at psychological support of 3000 level next week, the bulls might be ready for a rebound. If a rebound happens, STI would have formed a lower low and would be heading for a higher high formation. Currently, there are 2 possible levels to watch for a higher high formation. The immediate resistance level would be 3040 level which might not be a strong resistance level for a lower high formation. The next stronger resistance level to watch out for would be 3080 resistance level, where it might confluence with 20ma resistance if the price rebounds to that level.

In conclusion, STI is now trading close to the psychological support level of 3000, there is quite a good chance of this level to be holding as the indicators are now at the oversold region. However, as there is no bullish reversal signals being formed, 2960 support level could be tested for this week too. Hence, in order for STI to have chances of rebound, a bullish reversal candle should form at this 3000 support level, or else, we have to expect STI to slight further. Any rebound for STI right now would be capped at 3040 or 3080 resistance levels. 3080 resistance level would be a stronger resistance level for a good lower high formation. Thus, we can expect further selling pressure this week but rebound is also expected.

The strategy for this week would be pretty simple as the market is trading downtrend already. Staying on the short side would be more advantageous this week as the trend is downtrend. However, this does not mean that we should be actively shorting this week. As the STI has been trading lower for quite long period, chances of rebound is getting higher and higher. Hence, shortist must be prudent to take partial profit or else profits might erode away. Long traders have to be patient this time round. If there is bullish reversal formation at this support level, Long traders might adopt the counter trend technique to go in for a quick trade. Long traders must be eager to sell when STI reaches its resistance level.

What to watch out for this week:
1) Bouncing off 3000 support level to head towards 3040 resistance level.
2) Breaking of 3000 support level to test 2960 support level.

Trading strategy to adapt right now:
- Reduce short position if bullish reversal candles are being formed.
- Adopt counter trend strategy for the long side if a bullish reversal pattern is confirmed

*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.