STI’s downtrend has weakened

Last week, STI rebounded strongly after the banks planned to work together to improve the liquidity in the market by adjusting their bank rates. This brings cheers to the market as it can help to improve the current economic situation. STI ended 129pts up and it closes at 2773 level on Friday. Most of the gains were created on Thursday as STI gapped up a whooping 67 pts up which was due to DJI’s overnight rally. Last Friday night, DJI tried to trade higher but failed to maintain its gains and slighted back to the previous day’s closing and ended up 0.61pts. Its bullish strength failed to continue after its sharp rally on Wednesday night.  

STI broke last week’s expected resistance level of 2740. Will this breaking of resistance level turn STI’s trend back to uptrend again? Has STI hit the bottom and no longer downtrend?
Let’s examine STI’s chart closely.

Trend: Downtrend, 20ma down, MacD below 0

 

Support: 2740 (50ma & gap support 2704 – 2755), 2690, 2640

 

Resistance: 2790, 2830 (100ma), 2860

 

Observations:

Candlestick – White hanging man

Histogram – Many Gs. No divergence.

RSI – Around 45%. At RSI resistance. No divergence.

Stochastic – Around 85%. Overbought. No bearish crossover yet.

Bollinger Band – At mid band. Band narrowing.

 

Conclusion:

The positive news has brought back confidence in the market which caused traders to enter the market for bargain hunting, thus a sharp rebound was seen last week. Last week, it was expected to be resisted by 2740 resistance level which was a strong resistance level. However, a strong gap up caused 2740 resistance level to break easily. As noted in last weeks’ outlook, breaking of 2740 resistance level will jeopardize STI’s continuation of its downtrend. Last week’s movement can be seen as the weakening of STI’s downtrend strength and the trend can be easily reversed. Despite that, formation of lower high can still be possible as STI has not tested its previous lower high level yet. Hence, one should not jump into conclusion that the market has bottomed and uptrend has formed.

 

The mid-term indicators were still indicating downtrend despite the rebound last week. However, this mid-term downtrend might have a risk of reversing as the MacD line starts to form a bullish crossover. If this bullish crossover is being confirmed, STI’s downtrend might not be intact anymore. Hence, the short term indicators for this week is important to give us hints on whether a bullish crossover in MacD is about to happen. The short term indicators are in bullish momentum but this momentum is starting to show signs of weakness. Stochastic is now trading in the overbought zone and its lines are starting to narrow for a bearish crossover. If bearish crossover is seen for Stochastic this week, STI is likely to retrace.

 

As there is a risk of retracement due to overbought situation, one should identify where the possible support levels are. As STI had a gap up last week and even broke 2740 resistance level, 2740 resistance level has now turned into a support level. This 2740 support level is also in between the gap support level of 2704 – 2755. Furthermore, 2740’s confluence with 50ma line can mean that 2740 can be a firm support level. Last Friday’s candle has also proven this support level’s strength as its long lower shadow indicates a rebound happening after testing this support level. Therefore, 2740 level is the key level to determine whether STI will form a lower high. If 2740 support level is broken this week, there will be a high chance that STI will continue its downtrend formation which will lead to another lower low level.

 

On the positive side, if STI manage to hold above 2740, it will mean that the bullish strength is maintained. 2790 resistance level will still remain as a resistance level where STI might form a lower high formation. Failure to break it will mean that the downtrend is still intact. If STI breaks 2790 level this week, it would mean that the downtrend has ended and the trend is likely to change to either sideways or even uptrend. In order for STI to turn uptrend, it must be able to break 2830 resistance level which is currently in confluence with the 100ma line. 100ma is proven for the last 2 months that it is a tough level to break. Therefore, 100ma will be the key level to determine if STI has reversed to uptrend.

 

In conclusion, STI is now back to a key turning point level where downtrend can continue or downtrend might be reversed. 2740 support level will be the key support level to determine whether the downtrend will continue. On the other hand, 2830 level will be the key level to determine if STI has turned into an uptrend. Based on the indicators, the upside is getting limited and might be resisted by 2790 resistance level instead. Hence, testing of 2740 support is more likely currently as the downtrend is still intact. But if 2740 support refuses to break this week, it can be an indication that the downtrend might have ended and the downtrend might have reversed. Therefore, this week is an important week to determine the direction for the next few weeks.

 

What to watch out for this week:

1)      Testing of 2790 resistance level

2)      Testing of 2740 support level

3)      Breaking of 2740 support level

4)      Breaking of 2830 resistance level

 

 

Trading strategy to adapt right now:

-          Long traders should have taken some partial profits as the counter-trend positions have hit its targets. Trailing stops is to be established so as to prevent profits from declining.

-          Shortists might want to enter some short positions cautiously as the downtrend might not as strong anymore. Tight stop loss should be established.

 

 

*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.