Possible bullish divergence in STI

Last week, STI started with a weak opening as Euro concerns continues to loom the market despite policies being implemented for the Euro economy. Things started to turn around during the mid of the week as traders started to digest various economic data that was announced during the week. On Wednesday, STI enjoyed a strong rebound which brought it back above 2640 level and head towards 2690 resistance level. On the last 2 days of the week, traders were very cautious of entering the market as the market will be closed for Christmas holiday; which recorded one on the lowest trading volume for the year. Despite the weak volume, STI managed to close at 2676 level on Saturday.

The strong rebound brought hope to the market as it could be an indication of bottoming. If STI truly turning its trend to uptrend? Or could it still be in a downtrend momentum? How will STI likely to end this year’s trading period?
Let’s derive the conclusions from the chart.

Trend: Downtrend, 20ma flat, MacD below 0

 

Support: 2640, 2580, 2530

 

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

 

Observations:

Candlestick – Doji with lower shadow

Histogram – 3Gs. Bullish divergence.

RSI – Around 35%. Possible bullish divergence.

Stochastic – Around 85%. Overbought.

Bollinger Band – Closer to mid band. Band flattening

 

Conclusion:

STI had formed a lower low formation last week and is now heading towards resistance levels to form a lower high level. A lower low was formed at 2614 level where STI attempted to close the gap support between 2605 – 2620 levels. The gap support held well and good economic data helped STI to bounce back up above 2640 level. Hence a gap support was formed at 2628 – 2650 on last Wednesday. This gap support is likely to help STI to stay supported as it confluences with the horizontal support of 2640 level. However, as the current trend is downtrend, STI is likely to form a lower high during this rebound. To identify whether STI would have a chance to end its downtrend, indications from the indicators will help to assess the chances.

 

The mid-term indicators were still showing that STI’s downtrend is still intact and is likely to continue. However, its downtrend might be weakening as the RSI shows a possible bullish divergence while the Histogram showed a clear bullish divergence signal. The flatten 20ma line might also indicates that the bearish downtrend is starting to change too. This is probably due to the bullish seen in the short term indicators. Both the Histogram and Stochastic were showing bullish strength during last week’s rebound. This short term bullishness is likely to continue during the start of the week but it might be capped as Stochastic is now trading in the overbought zone.

 

Based on the short term indicators, STI might still have bullish strength to head towards 2690 resistance level. However, it might not be able to break 2690 resistance level as Stochastic is indicating overbought. Furthermore, 2690 resistance level could be a strong resistance level as the horizontal resistance confluences with the 20ma line. Hence, it will likely cap STI’s further advancement and could be a possible point for STI to form a lower high. If lower high is being formed at this level, STI will have a higher chance to continue its downtrend movement.

 

As there is a possible formation of bullish divergence, there might be a chance of trend reversal in STI. In order for STI to reverse to uptrend, it must either form a higher low or a higher high. To form a higher high, STI must be able to break current resistance level of 2690 and also break the next 2 resistance levels of 2740 and 2790 levels. 2740 is a much stronger resistance level than 2690 as it confluences with 50 & 100ma lines. Furthermore, to confirm a higher high formation, STI must be able to trade higher than 2790 level. Therefore, it will be tough for STI to be able to break 3 resistance levels at 1 go; given that Stochastic is now trading in overbought zone. Hence, STI’s trend reversal chance will have to rely on a higher low formation. Currently, the best support level for a higher low to form will be at 2640 level. 2640 level can be a firm support level as its confluences with gap support between 2628 – 2650 levels. Therefore, 2640 level will be the key level to watch out for a possible trend reversal.

 

In conclusion, STI’s downtrend movement is starting to show signs of weakening due to possible formation of bullish divergence. In order for this bullish divergence to be confirmed, STI must either form a higher high formation or a higher low formation. Possibility of higher high formation is currently very low as the short term indicator is showing overbought signal and the resistance levels are strong. Hence, higher low formation will have a higher possibility to form. 2640 support level will be the key level to determine if STI is going to continue its downtrend or forming a higher low formation. If 2640 support level fails to hold, STI will continue its downtrend movement. If 2640 support holds and rebounds, STI will have a good chance to form a possible uptrend. Hence, for this week, STI will be struggling between 2640 – 2690 levels as the market condition will likely to continue to be cautious. Traders will be cautious due to the New Year ’s Day holiday. Therefore, STI will likely to end the year between 2640 – 2690 levels.

 

What to watch out for this week:

1)      Testing of resistance at 2690 level

2)      Testing of 2640 support

 

 

Trading strategy to adapt right now:

-          Long traders should reduce their long positions when resistance levels are met.

-          Shortist might take some short positions when there is bearish reversal formation at resistance level. Cautious position size should be done as there is bullish divergence signal.

 

 

*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.