STI’s downtrend to continue

After its failure to hold at 2740 support level last week, STI continues to trade lower as Europe concerns rises. The week started with an attempt to bounce off at 2690 level, but it failed to break its gap resistance and 20ma resistance line. 2690 support was broken during the week and 2640 support level was tested and broken slightly on Thursday. However, last Friday market action ended with a rebound to test the gap resistance level between 2654 – 2670 levels. But it did not manage to break it and STI ended the week at 2659 level. Fears of downgrade of Europe’s credit rating continue to loom the market as Fitch, a rating agency, warns of possible downgrade of rating. This causes the US market to close slightly red.

2640 support level seems to be holding the market to prevent it from going for a lower low. Or could the rebound just be merely a gap covering action? Will the downgrade of credit rating cause STI to drop further this week?
Let’s analysis STI’s last week’s chart.

Trend: Downtrend, 20ma down, MacD below 0

 

Support: 2640, 2580, 2530

 

Resistance: 2690 (20ma), 2740 (50ma), 2790 (100ma)

 

Observations:

Candlestick – One white soldier pattern.

Histogram – 1G after a few Rs. Bullish signal. No clear bullish divergence.

RSI – Around 50%. At RSI resistance. No divergence.

Stochastic – Around 15%. Bullish crossover formed. Oversold.

Bollinger Band – Closer to lower band. Band narrowing.

 

Conclusion:

STI did indeed continue its downtrend movement last week and it had clearly broken its immediate support level at 2690. Another key support level of 2640 level was broken but last Friday rebound had make the broken support looked like a whipsaw action. However, the rebound could also be a possible gap covering action after a gap resistance was formed on Thursday. Although the support might seem to hold last Friday, the overall trend still remains downtrend and there is a higher probability of a lower low formation. Hence, the market might be doing a gap covering action last Friday. To confirm this assumption, let’s confirm with the indicators.

 

The mid-term indicators were still showing downtrend momentum and Friday’s rebound did little to change the downtrend momentum. RSI shows that it has been resisted by the 50% resistance line for whole of last week and this is also another clear indication of a downtrend situation. However, the short-term indicators were showing a different story. Last Friday’s rebound had caused STI to form not only a bullish candle pattern, it also triggered bullish signal in both Histogram and Stochastic. With Stochastic in the oversold region, it could also help to increase the odds of the rebound to continue. Therefore, the short-term momentum is bullish while the mid-term momentum is bearish. Key resistance levels are to be identified to understand when the mid-term momentum will change.

 

As there is a possibility that STI starts the week bullishly, resistance level should be identified clearly. In order for the short-term bullish signals to be confirmed, it must close higher on Monday. Friday’s high was at 2667 level; hence, if STI closes higher than 2667 level on Monday, the signal will be confirmed. However, there is a gap resistance between 2654 – 2670 levels. STI must convincingly break this gap resistance level in order to conclude that its bullish actions are not merely gap covering actions. Therefore, in order to deem that STI is indeed turning bullish, it must break 2670 level. If that happens, STI would be heading for the next resistance at 2690 level where 20ma is expected be.

 

Although the short-term indicators were showing bullish signs, there could be another possibility that STI is merely doing a gap covering and the bullish signals fails. If STI is unable to break 2670 gap resistance level this week, 2640 support should be tested again and this time round, it might not be able to hold its support. Due to the downtrend formation, STI will make a lower low formation. In order for a lower low to be formed, it must break 2640 support level and heads for a lower support level. When 2640 support is broken, it will be heading towards the gap support levels of 2605 – 2620 or even the horizontal support of 2580. Over at these levels, there is a higher possibility of lower low formation.

 

In conclusion, STI’s downtrend is expected to continue in the midst of Euro fears. A rebound at the start of the week can be expected but its upside is more likely to be capped by the upper gap resistance of 2670. More importantly, there are more chances of STI to head towards a lower support level. Its current support at 2640 level might be compromised this week and it is likely to test the next possible support levels. 2605 – 2620 gap support levels can be a possible support for STI to form a lower low formation. Another possible support level would be at 2580 level. Henceforth, STI’s selling pressure will still continue until it has found a good support level for the lower low formation to be formed. Upside will be capped by the gap resistance and 20ma resistance line.

 

What to watch out for this week:

1)      Testing of gap resistance 2654 – 2670 levels

2)      Breaking of 2640 key support level

3)      Testing of 2605 – 2620 gap support levels

4)      Testing of 2580 horizontal support level

 

 

Trading strategy to adapt right now:

-          Long traders should avoid the long side as the trend is downtrend. Wait for STI to test a good support level before adopting counter-trend strategies.

-          Shortist can hold on to their short position with tight trailing stops. Add new short position only when it shows clear bearish signals and good risk reward.

 

 

*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.