Global market meltdown.

Last week felt like doomsday for the market. Expected continuation of uptrend suddenly turned into a downtrend scenario within a day. STI dropped 194 pts in a week! This is very rare! This kind of drop only occurs during the long term bear market which last remembered was during 2008. The catalyst for this meltdown was triggered primary due to the US debt ceiling issue. The US ceiling issue has been lifted and resolved which by right should bring joy to the market. However, the situation is not as simple as it seems, as the debt limit is being raised, credit rating agencies like S&P, Moody’s, etc …, decided to take this raise in debt limit to a different perspective. As the credit rating agencies see that rising credit would means higher default risk, they have proposed to lower the credit rating of US. This proposal sends shocks to the market causing investors to flee the market in anticipation of further economic slowdown in US. As US is an economic giant, any economic impact would also affect the global market prices. Hence, Singapore market was too affected. Over the weekend, the credit rating agencies have confirmed the downgrade of AAA credit rating to AA+ credit rating; First for US in its history.
With such shock happening in the market, traders are now confused and scrambling to close their long position in hope to safeguard their capital. However, there were traders whom are looking at the situation to be a golden opportunity to buy stocks as the prices of the stocks had went significantly lower over the week. The question now is whether the market had hit a bottom for a rebound or does it have more room to fall further?

Let’s get the answer from the chart.

Trend: Possible downtrend, 20ma pointing down, MacD around 0

Support: 2970, 2930, 2890

Resistance: 3010, 3040, 3080

Observations:
Candlestick – Black spinning top.
Histogram – 4 Rs. Bearish divergence.
RSI – Around 40%. Not in oversold yet. No divergence.
Stochastic – Around 22%. Not in oversold yet. No bullish crossover yet.
Bollinger Band – Out of lower band. Band opening up.

Conclusion:
STI failed to hold above 200ma last Wednesday after the increase of the US debt ceiling, which also caused a gap down during that day. On Thursday, STI failed to rebound off 100ma support and eventually closed below 100ma support. This price action on Thursday has already hinted that STI might not be forming a higher low. On Friday, STI received a meltdown shock from US and gapped down strong on Friday. This gap down is massive as it broke 4 support levels immediately without mercy. As 3080 is the previous higher low formed, breaking it would be a formation of lower low. STI is now trading lower than 3080 level and is confirmed going for a lower low formation. Will it continue to go lower after Friday’s massive gap down? Indicators should give some clues.

The trend indicators are starting to change their indications to be poised to the bearish trend. 20ma had started to turn downwards and MacD might be starting to go below 0 level. STI trading below 200ma also pose a risk of a long term downtrend. The short term indicators continued to show bearishness and hence price are likely to continue in the short term. Oversold situation are not seen in the indicators, therefore, selling might not have ended yet. Hence, based on the indicators, STI’s trend might have turned into downtrend and could be a prolong one. Selling would continue until the indicators start to trade in oversold region.

As selling is expected to continue for this week, support levels should be explored to determine where STI would form a lower low formation. Currently, 2970 level seems to be a good support level for STI to hold as Friday’s candle shows its lower shadow attempting to test that support level. However, as the indicators are still showing no signs of weakness in the bears, STI might even fall further to test 2930 support level. In the worst case scenario, we might even see STI reaching 2890 support level. These are 3 support levels that we can watch out for a lower low formation.

If a lower low is being formed, rebound would occur. However, as this is a downtrend formation, lower high would be formed after a rebound. Hence, based on current resistance level, lower high could possibly be formed at 3010 level or even 3040 level. The gap resistance that is being formed will also pose as a resistance level for STI. Therefore, with such a big gap down, it is hard to imagine that STI will go back to its previous 3200 level again.

In conclusion, STI is likely to continue its downward movement for this week until it is in an oversold condition. Support could be found at 2970 or 2930 or worst case 2890 level. Upside is most likely being capped for now as the indicators are still bearish. With these reading, STI is likely to go for a new downtrend cycle which might take quite a few months to form. Uptrend formation is very unlikely for now as this downtrend cycle could have just started. Traders might want to strongly consider being more focus on the short side as downside chances are higher currently. But as the price had dropped significantly, it would be safer to wait for a clear lower high formation to initiate short positions. Long traders whom have long positions might be bleeding red. Cutting loss can be a good strategy to protect further losses to practise now. Further risk is needed if one refuses to cut losses. Any rebound in prices would be a good opportunity for long positions to be closed.

What to watch out for this week:
1) Testing of 2970 or 2930 support.
2) Rebound to test 3010 or 3040 resistance.

Trading strategy to adapt right now:
- Initiate short positions when lower high is formed.
- Close long positions when cut loss level is reached.
- Close long position when lower high is formed.

*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.