STI could be at a critical turning point

STI failed to hold its gains on Monday and even attempted to break 2740 support level last week but it failed to maintain below the level. For most of the week, STI hovered between 2730 – 2770 levels before it managed to go for a rebound at the end of the week. But the rebound on Friday did not help STI to recover the losses it had incurred on last Monday; hence, STI closed 36pts down for the week. The recovery on Friday was mainly due to developments by the EU to solve the debt crisis. However, over the weekend, nothing concrete was developed. US market’s movement last Friday was lack of zest and went up a humbly amount of 75pts. Upcoming FOMC meeting in the US market might bring more joy as speculation were speculating of further stimulus measures to be in placed over the meeting tomorrow.

Will STI still be trading cautiously this week? Or will high volatility be seen due to various economic news announcing this week?  
Let’s get the answer from the chart to decide how STI will fair for this week.

Trend: Sideways, 20ma flat, MacD below 0

Support: 2740, 2680, 2650

Resistance: 2800 (20ma), 2880, 2930

Observations:

Candlestick – Small white candle with upper shadow

Histogram – 2 Gs. No Bullish divergence.

RSI – Around 55%. No Bullish divergence.

Stochastic – Around 50%. No bearish crossover yet.

Bollinger Band – Band squeezing. Mid band turn flat.

Conclusion:

Last Monday, STI created a big gap in reaction to US market’s drop the previous week. This gap between 2770 – 8223 levels is now a resistance level that STI is facing. Various attempts to close the gap during the week were seen but last Friday’s bullish strength closed most of the gap. STI’s bullish attempt last Friday was capped not only by the gap resistance level; it was also resisted by the horizontal resistance of 2800 and 20ma resistance line. The upper shadow that was formed last Friday is the best evidence that shows STI’s resistance at 2800 level.

 The key now is whether STI will maintain its sideways movement for this week. Last week, STI managed to bounce of 2740 support level and thus, maintaining the sideways integrity as lower low has not formed. As the sideways range is likely to be between 2680 – 2800 levels, STI could be rebounding towards 2800 and test it again. However, last Friday’s candle shows that STI might face some trouble breaking its immediate resistance level at 2800 as it has multiple confluences of resistance levels. Hence, it is wise not to jump into conclusion that STI would be heading towards 2800 level again.

The mid-term indicators for this week still shows that STI is in sideways trend but its underlying is still bearish. There is no significant change in the mid-term indicators after last Monday’s gap down or last Friday’s rebound. However, the short term indicators for last week were showing bullish momentum. Bullish signal were being triggered last Thursday and last Friday’s closing confirmed the bullish signal. Although the resistance level is seen to be strong, there might be a good chance to break it if the bullish signal is a strong one.

As STI is now at the situation where it faces strong resistance level while its short term indicators are indicating bullishness, it would be fair to look at 2 possible scenarios. If 2800 resistance level is very strong and refuses to break, a bearish black candle should be forming during early of this week and would cause STI to form a lower high formation. This would be a bearish scenario and STI might be threatening to form a downtrend. Downtrend will be confirmed if STI managed to break 2680 support level. On the other hand, if 2800 resistance level breaks, sideways trend will continue and STI would be heading towards 2880 resistance level again. This scenario would mean that STI will consolidate for a while more.

In conclusion, STI is now trading in critical point of deciding whether it will continue to consolidate or will it continue its downtrend movement. The upcoming FOMC and EU meetings might be a defacto to decide the direction of the market. As the underlying trend is downtrend, in theory, resistance level should hold. Therefore, 2800 resistance level would be a key level to watch out this week. If a bearish black candle is formed at 2800 resistance level, a possible downtrend lower high would be formed and chances of downtrend formation will be greatly increased. Downtrend will only be confirmed if the sideways support of 2680 level is broken. On the other hand, if 2800 resistance breaks, we will see STI retaining its sideways trend and would be heading towards 2880 level again. It is everyone’s guess for this week.

Long traders might want to continue to stay cautious and avoid going on long especially the market is at resistance level. Decision on closing long position can be a good choice now and taking further risk is need if one is hoping for 2800 level to break. Shortist should be getting ready to pull trigger once a confirmation of bearish reversal is being seen at current resistance levels. Shortist should also be cautious on their trading size to avoid addition losses as the situation if uncertain right now.

What to watch out for this week:

1)      Testing of 2800 resistance level.

2)      Breaking of 2800 resistance level.

3)      Breaking of 2740 support level.

Trading strategy to adapt right now:

-          Stay aside.

-          Close long positions.

-          Take short positions cautiously.

*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.