Techincal rebound after a heavy selloff.

The worst week ever happened for STI last week despite of the high speculated National Day rally. STI dropped to its lowest point with around 9% down before it recovered around 5% during the end of the week. Its drop was plagued with multiple gap downs without giving long traders chance to exit the market at a good price. Buying volume was really thin while selling volume was heavy. Sellers would make use of any slight chance of rebound to sell off their positions. However, selling sentiment start to thin out last Thursday when price bounced off strong from its intraday low after testing 2740 and 2800 support level. Confidence came back to the market as US market shows bullish strength over the night. This greatly encourages STI to recover some of its losses over the week and ended only 4.8% drop for the week.
Will this rebound continues for this week? Is this rebound likely to be a technical rebound or will this rebound brings us to the previous level before this big drop happens?

Let’s get the answer from the chart.

Trend: Downtrend, 20ma pointing down, MacD below 0

Support: 2800, 2740, 2690

Resistance: 2890, 2930, 2970 (Falling window resistance at 2942 – 2973)

Observations:
Candlestick – Small white candle after a black hammer formation. Possible morning star formation.
Histogram – 4r1g. No Bullish divergence.
RSI – Around 20%. Oversold. No Bullish divergence.
Stochastic – Around 22%. Just turn out from oversold. Bullish crossover confirmed.
Bollinger Band – Just starting to trade above lower band.

Conclusion:
STI continues to break multiple support levels last week as fears start to plague the market even more. 2 gap downs were formed last week which will now form 2 gap resistances at 3026 – 3105 and 2942 – 2973 levels. These gap downs might create an effect called exhaustion gap where it can increase the chances of market having a technical rebound to close the gaps. Currently, the closest gap resistance is at 2942 – 2973 levels. This gap resistance also confluence with the immediate resistance levels of 2930 and 2970. Therefore, STI might find trouble trading beyond these levels if a technical rebound happens.

The trend indicators had confirmed that STI’s current trend is downtrend and should be heading for further downside after a lower low and lower high has been formed. Based on the short term indications, STI is likely to form lower low formation now as there is confirmation on the bullish reversal candle at 2740 support level. Indicators like Histogram and Stochastic is showing bullish indication too. Furthermore, oversold indications are also seen in the RSI and Stochastic. Therefore, STI will no doubt have a bullish rebound for this week.

However, as the trend is currently downtrend, lower high would be formed after a lower low is being formed. If STI continues to rebound this week, it will face strong resistance at resistance levels. As pointed out earlier, STI will be facing strong resistance from the immediate resistance level and gap resistance. Therefore, 2930 and 2970 resistance would be the key resistance level to watch out form. However, before reaching 2930 resistance level, there is another minor resistance level at 2890. Although 2890 resistance might not be as strong as 2930 or 2970 resistance level, it can still have a chance for a lower high formation there. Hence, 2890 will be another milestone for this rebound.

Although the analysis states that the odds are more on the bullish side, we should not rule out the possibility of the rebound to fail in such bearish market. If the bullish signals failed to confirm, we will like see STI to test 2800 support again or even 2740 support level. 2740 support level would be the last line of defence for the possible rebound. If 2740 level fails to hold, downtrend would continue and STI will seek the next support level at 2700 level.

In conclusion, STI is likely to rebound this week towards the gap resistance of 2942 – 2973 as the short term indicators are showing bullish indications. However, we must also take note of the immediate resistance level of 2890 as it can also cap the upside. This rebound will more likely be a technical rebound as the trend indicators are indicating that STI is currently downtrend. Hence, as lower high would be formed, upside should be capped. However, in the worst case scenario, STI might not have a proper rebound and it continues it downtrend movement. The key support level to watch out for the worst case scenario is 2740 level.
Long traders whom did not adhere to the cut loss levels and were hoping for a technical rebound should make use of this rebound to clear their long positions. Adding long position currently is not advisable for now. If long positions are initiated as a counter trend trade, caution must be taken to take profit quickly when resistance levels are reached. Short traders might want to take some profits for their short positions as STI might rebound higher. New short positions can be initiated once bearish candles are being seen at the resistance levels.

What to watch out for this week:
1) Rebound to test 2930 or 2970 resistance level.
2) Breaking of 2740 support level.

Trading strategy to adapt right now:
- Initiate short positions when lower high is formed.
- Close long positions when resistance 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.