Dead cat bounce or trend reversal?

STI failed to hold at the support level of 2650 last Monday and prices plummet downwards quickly. It broke its next support level of 2580 and tested the stronger support level at 2520. The market managed to hold itself well at its support level of 2520 by rebounding strongly on last Thursday. The rebound was so strong that the support turn resistance level of 2580 level broke easily with a gap up. Last Friday, before the end of the week, STI managed to test 2650 level again but this time round as a resistance level. It did try to break that level but it still ended up lower than 2650 resistance level.  

The US market ended its week with a slightly negative closing. Will this have an impact on STI’s opening for this week? Will STI be able to break 2650 resistance level and head for 2680 resistance level?
Let’s get the answer from the chart to decide how STI will fair for this week.

 

Trend: Downtrend, 20ma down, MacD below 0

Support: 2580, 2520, 2420

Resistance: 2650, 2680 (20ma), 2740

Observations:

Candlestick – Short white candle with upper shadow.

Histogram – 2 Gs. No Bullish divergence.

RSI – Around 40%. No Bullish divergence.

Stochastic – Around 40%. No Bearish crossover yet.

Bollinger Band – Price closer to mid band.

Conclusion:

Breaking of the 2650 support level last week has affirmed that STI is now trading in a downtrend. As downtrend is being confirmed, STI is seen to be likely to form a lower low formation. STI was quick to form a lower low formation after it tested 2520 support level at a short time span of 3 days. The rebound on Thursday and Friday has confirmed that STI formed a lower low formation. Therefore, after a lower low formation is formed, given that the current trend is a downtrend, there will be a high chance of formation of a lower high. Lower high will indicates a continuation of downtrend movement.

The mid-term indicators remain bearish as the trend continues to be bearish despite last Thursday’s strong rebound. Currently, there are still no signs that the mid-term downtrend is weakening. Hence, there could be more selling pressure for STI. On the other hand, the short-term indicators are showing bullish momentum due to the strong rebound last Thursday to Friday. These might indicate that STI might have a bullish start for this week before we can see some selling pressure. However, last Friday’s candle gave some hint that STI is starting to face resistance as the candle formed upper shadow with short candle body. Henceforth, the odds are still on the bearish side and upside is getting more limited.

STI is likely to continue its bullishness early this week as the short term indicators have yet to show weakness. 2650 resistance level might continue to limit the upside but it can be broken easily as there is no clear indication of bearishness yet. However, if 2650 fails to resist, 2680 resistance level should stop STI from going higher. 2680 is a strong resistance level because of its confluence with 20ma. Therefore, 2680 resistance is a key level to watch out for a lower high formation. Based on estimation, 2680 resistance level could be tested early this week and confirmation of lower high will be during the mid of this week. Support levels will be tested again once lower high are formed, hence, the important support level of 2520 will be tested again.

In conclusion, STI is expected to continue its rebound early this week but will be capped by 2680 resistance level as this resistance level is a strong resistance level. As the downtrend is still intact, there is a good chance that STI might continue its downtrend after testing its resistance level and threaten to test 2520 support level again. This continuation of downtrend could start during the mid of this week and therefore, one should be prudent of not to engage on the long side when the resistance level is reached.

Long traders are to be reminded not to chase the bullish price and should be wise to reduce or even close their long positions when resistance levels are being tested. The risk of downtrend is still high and therefore, Long traders should be wise to stay away for the time being. On the other hand, Shortist’s shorting opportunity is approaching. Any bearish black candle formation can be a good entry point for short as long as it is formed at the resistance level. Good risk reward is a must before entering a short position this week.

What to watch out for this week:

1)      Testing of 2680 resistance level

2)      Formation of bearish reversal candle at resistance level

3)      Testing of 2520 support level

Trading strategy to adapt right now:

-          Short as resistance level whenever a bearish formation is formed.

-          Close long positions when cut loss points are breached or resistance levels are tested.

*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.