Uncertainty created by Italy and US debt woes

Last week, STI suffered a strong sell down due to new worries arise in Europe. Italy was pointed out as another potential candidate to suffer debt woes after Greek’s debt is being resolved. This caused investors to flee for safety as they reduced their exposure in the already weak market. The important support level of 3110 was breached last week after the announcement. However, STI managed to maintain its foothold at 3080 support level which if the last level where STI could possibly form a higher low formation. At the end of last week, new concerns arises in the US market as the politicians are arguing on whether to rise their debt levels or to default their debts which is due for a conclusion on 2 Aug. This could bring more uncertainty to the market. Will STI be able to maintain its support at 3080 this week?

Let’s get the answer from the chart.

Trend: Sideways with possible uptrend, 20ma flat slightly turning up, MacD slightly above 0

Support: 3080, 3040, 3000

Resistance: 3110, 3155, 3180

Observations:
Candlestick – Small black candle.
Histogram – Many Rs. No divergence.
RSI – Close to 50%. No divergence.
Stochastic – Around 30%. Bullish crossover last week.
Bollinger Band – At mid band. Bands starting to squeeze again.

Conclusion:
After STI had tested 200ma the previous week, it failed to stay above 200ma as Italy debt woes start to affect the market. It started the week with a bearish candle threatening to break the strong support at 3110 level. 3110 support level eventually broke and STI started to trade below 50ma and 100ma. The next support level of 3080 level managed to maintain its support despite the bearish sentiment that STI is encountering. This support held well for the week but failed to push STI for a good rebound during the week. Upside was capped by the gap resistance of 3103 – 3116 level which also confluence with 50ma and 100ma last week.

The trend indicators continued to trend upwards despite the sell down last week. This could be due the lagging effect in the trend indicators. The short term indicators are mixed as the Histogram is still showing bearish sentiment while Stochastic is showing signs of bullishness. This mixed signal could be due to the sideways movement STI is experiencing right now. Hence, chances of sideway formation should be higher.

As sideways trend is more likely to be formed, STI could find support at 3080 and rebound towards 3155 level to confirm it’s sideways. Or the other possibility is that STI could fall further to test 3040 as support before it rebound towards 3155 resistance level again. Therefore, it is quite uncertain to derive which scenario STI will be heading towards. However, if the stochastic’s bullish crossover is indeed triggering a right signal; chances for 3080 support level to hold will be higher.

On the other hand, if handling of the debt issues turned out to be bad, it will create a much bearish impact to STI. Hence, a worst case scenario will happen if STI breaks 3040 support level. Breaking 3040 support would mean the underlying trend of STI will change into downtrend. It will also mean that the weekly chart will likely to change to downtrend and STI will be heading for a deep drop in the coming months.

Despite the worst case scenario being identified, STI’s underlying bullish long term uptrend is still intact. Sideway consolidation should still be expected for this week whereby chances of a rebound from the support levels are still expected. The only issue currently is which support level STI will hold at. Currently, 3080 support level has proven last week to hold for 4 consecutive days. Hence, STI is likely to continue to trade at 3080 support level. Upside for the possible rebound might likely be capped by the gap resistance between 3103 – 3116. However, if STI is able to break this gap resistance, Further upside towards 3155 level is very likely to be seen.

The strategy for this week will still be a very cautious trading style. There were lots of uncertainty and mixed indication from the indicators. Quick and careful trades have to be adopted which will also come with lots of risk. Hence, staying sidelines could be a better choice for people whom cannot afford the time to do quick trades and cannot take risk. For risk takers, it will be better to stay on the long side as a possible rebound is still expected. However, quick profits must be taken when the rebound reaches the resistance level.

What to watch out for this week:
1) Testing of 3080 support level.
2) Breaking of 3080 support level.
3) Testing of 3103 – 3116 gap resistance level.

Trading strategy to adapt right now:
- Close short positions when retracement level is reached.
- Initiate long positions when it is at support level.

*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.