Ushering 2012 with a yearly outlook for STI

 

2011 was a year of volatility that was plagued with numerous sideways movements. Volatility could have been caused by numerous major events that could have economic impact on the market. The major events were the General Election, Presidential Election, Downgrade of US credit rating, Major earthquake in Japan that lead to nuclear crisis and lastly, the blow out of the European Crisis. Negative news came after one and other which strike fear to individuals which lead to confidence in the economy being lost. Investors and traders start to be cautious with their existing assets and would rather stay cash rich. These had lead to bearish market movements with weak trading volume throughout the year. Numerous efforts were done by the Singapore Exchange to boost up the trading volume. For example, introduction of high speed trading mechanism, changing of bid spread and implementation of trading during lunch hours. These efforts did not turn out to be fruitful during this year but it could have helped to prevent weaker trading volume. For this year, 2012, investors and traders confidence will be the key to determine if the market will continue to be a bearish period.

 

Below is a summary of the key events that happened which could have impacted the market.

This year, 2012 could either be of a period of strong bull or it could be a continuation of the bearishness from the last year. Based on the weekly charts, we can see that STI peaked on 2010 and during 2011, STI has started retracing. If my drawings of the Elliot waves are correct, 2011 is a corrective wave after a bullish wave that happened between the years of 2008 – 2010. 2011 had also tested the 32.8% retracement level of the bullish wave and did not break the level. Hence, there could be 2 possibilities for the upcoming 2012.

1)      32.8% level held well and a new bullish wave would be formed

If this scenario happens, it would mean that for the whole year of 2011, STI is actually forming a corrective wave of the bullish wave that was formed from 2008 – 2011. Theoretically, after a corrective wave, price would have a tendency to continue its previous bullish movement and this will lead to a new high in the charts. The new high can be anticipated with Fibo projections as follows.

If STI manages to form a bottom at 38.2% level and starts to form an uptrend movement during this year, we would see a start of a bullish run again which can hit a high of 3660 level or even reach 4370 level.

2)      The retracement wave have yet to complete and it will continue to retrace further

If STI fails to hold at 38.2% retracement level this year, it would indicate that STI has yet to find a bottom and will likely to continue lower. 2 possible levels for STI to form a bottom will be at either 50% (2387) or 61.8% (2167). These 2 Fibo levels will also be the key to determine whether the Elliot wave readings are accurate. In theory, the maximum retracement for a bullish wave is up till 50% level. If STI trades below 50% level, there is a risk that the bullish wave might not be able to continue anymore. Therefore, if STI fails to trade above 50% level, STI might be going for a long term downtrend and 2012 will be a year of bearishness. By that time, chart projection has to be reviewed again.

 

To determine which direction STI is going to take for this year, the indicators should be able to give us some hints of the direction for the next few months. And lastly, the support and resistance levels will help us to determine which scenario STI will take for this year.

Trend (Weekly): Downtrend, 20ma flat, MacD below 0

Support (Weekly): 2600 (Fibo 32.8%), 2390 (Fibo 50%)

Resistance (Weekly): 2740 (20W, 200W), 2900, 3000 (50W, 100W)

Observations:

Histogram – 1R. Bullish divergence seen previously.

RSI – Around 50%. At RSI resistance.

Stochastic – Around 25%. Flat %D. Crossovers not clear.

Bollinger Band – Between lower band and mid band. Band Squeezing.

 

The weekly trend is seen to be a downtrend and this indicates that it is likely to continue its downtrend if the conditions are correct. Lower high has been formed at 2900 level and for the past few weeks, the index has been retracing and this could push STI to form a lower low. In order for STI to break for a lower low, it must break 2520 level. Hence, further downward pressure is to be expected for upcoming weeks based on the weekly trend only.

 

From the indicators, the selling pressure has been weakening and it is unlikely to derive more selling pressure for the next few weeks. Stochastic had flattened out after a bullish crossover formation and MacD line itself had also flatten. At the same time, RSI is also trending close to 50% line. These are indications of a possible sideways movement which STI could be experiencing now. This sideways formation could be due to the bullish divergence that was seen forming in the Histogram previously. Therefore, there is a chance that the downtrend has been changed into sideways. However, this sideways might be short-lived as the Bollinger band starts to form a squeeze. A breakout of either side could occur and this will be the defacto for STI upcoming direction.

 

Hence, STI’s current support and resistance levels will be deciding levels to determine its directions for this year. As it could be a possible sideways, its recent high and low levels will be the sideways range STI will trade in. STI formed a recent high at 2900 level while its recent low is formed at 2520 level. Therefore, the sideways range is between 2520 level to 2900 level. Breaking the support will mean continuation of the downtrend while breaking the resistance will mean change of trend to uptrend. Henceforth, breaking of 2520 level will mean further downside for STI while breaking of 2900 level will mean upside for STI.

 

To conclude the expectations for this year 2012, STI is now sitting on the fence as the upcoming direction is still very uncertain. The 2 key levels, 2520 & 2900, will be the determining levels for STI direction for this year.  Cautious trading is to be expected for the start of the year as Investors and Traders are still finding good reasons to enter the market. Situations in European are expected to continue to drag on early this year but it should be resolved soon. If Europe crisis is being resolved, it should bring a change in market sentiment and it will bring back the interest to the market. This year’s expected key event would be the US presidential election and the Olympics. These events might either lift the moods of the market or dampen the moods.

 

Personally, I yielded for more positive expectations for this year while watching for these 2 key STI levels. I am expecting a vibrant bullish movement this year if my assumption of the Elliot wave in STI is correct. I am also prepared for the worse if the market decides to take on the bearish streak. Either way, one should be prepared to tackle the situation as the market is always correct. Putting technical analysis aside, after studying the fundamentals for the whole 2011, I have realised that the fundamental values of various companies are getting very attractive. Upcoming Full year announcements of companies are likely to bring some positive mood to the market. Therefore, my expectations for the key turn point of the market will be during Feb or Mar period where corporate earnings are being announcement.