Straits Times Index facing threat of downtrend formation. | Jay Chia - Your Financial Mentor

Straits Times Index facing threat of downtrend formation.

Straits Times Index facing threat of downtrend formation.
Straits Times Index facing threat of downtrend formation.

Straits Times Index experienced another week of blood bath as more market participants scrambled to exit the market due to concerns on world economic situations. During the early week, STI refuses to trade lower and was holding well. However, when there were talks of political unrest, many market participants decides to take the cautious approach and exit the market. On Wednesday, STI broke the important 20 week MA support at 3500 level. This break down had lead to strong selling pressure as breaking it symbolises reduction of uptrend formation possibilities. The bearish movement last week had coincides with the common phenomenon of “Sell in May and go away”. This could also have contributed to the bearish action during the week which leads STI to close at 3427.51 level with 85.72pts down for the week.

With such strong bearish action that happened in STI last week, how will STI behave this week? Will further downside happen?

Let’s look into STI’s chart to determine the outcome.

Trend: Uptrend, 20 weekly MA flattening, MacD above 0.

Support: 3350 (50 week MA), 3270, 3190

Resistance: 3450, 3530 (20 week MA), 3630

Observations:

Candlestick – Long black candle.

MacD – 3 Rs. No Bullish crossover. No bearish divergence.

RSI – At 40.1%. No bearish divergence. RSI support broke.

Stochastic – At 15.6%. No bullish crossover yet. Oversold.

Bollinger Band – Close to lower band. Band tightening.

Conclusion:

Last week’s bearish movement had created a lot of fear in the market. This is because the important 20 week MA support line at 3500 level was broken. Breaking this support level will trigger a lot of profit taker’s trailing stop level. Therefore, strong selling pressure was seen after this support level has been broken. Its failure to hold at the next support of 3450 level also indicated that the bullish confidence in the market is very weak currently. High trading volume during the week also reassures the weakness in the market. Therefore, it is important to identify whether STI will be starting to form a downtrend movement instead of the anticipated uptrend formation.

 

The mid-term indicators are starting to show signs of bullish weakness currently. RSI had failed to hold at its 50% support level and this is a strong indication of bullish weakness. However, MacD line is still above the 0 level and this might give some hope for STI’s underlying bullishness. Shorter-term indicators are clearly on the bearish side now. Both histogram and stochastic are showing bearish indications which can lead to further bearish actions in the shorter-term. However, Stochastic is now in the oversold region which can lead to limited downside for STI.

 

With bearish possibilities to happen for STI, it is important to identify the bearish extend of STI. The first support that STI will be testing is at the 50 week MA line, which is at around 3400 level. The current level of STI is close to this support line which might lead to some buying support in STI. STI had been support by this 50 week MA line early this year. Therefore, there might be some possibilities of rebound when STI is testing this support level. To confirm this support level, STI must first be able to rebound back above the support turned resistance level of 3450 level. When this happens, STI will then be able to start recover back to its previous support of 3530 level.

 

However, if STI fails to hold at the 50 week MA line, further bearish pressure can lead STI towards its sideways support of 3350 level. This sideways support level is a very important support level. Breaking this support level will confirm STI’s trend formation to be downtrend. When downtrend is formed, it will also mean that the uptrend of STI will fail to happen. Therefore, STI must hold above 3350 level for coming few weeks. Failure to do so can lead to further downside pressure towards support of 3270 or even 3190 levels.

 

In conclusion, the Straits Times Index is now at a crucial level. Breaking 50 week MA line at 3400 level can lead to failure of uptrend formation. The last line of defence for STI is at 3350 level where it should be a strong support for sideways formation. Failure to hold this support level will mean that STI will be forming downtrend which can lead STI towards 3270 support levels. However, if STI is able to rebound this week, it has the potential to remain uptrend. But it must first be able to recover above 3450 level for this week. Otherwise, STI will not be able to recover the important level of 3530 level.

 

What to watch out for this week:

  1. Testing of 3400 support level.
  2. Breaking of 3400 support level.
  3. Breaking of 3450 resistance level.
  4. Testing of 3350 support level.

Trading strategy to adapt right now:

  • Long traders take cautious positions when support level at tested.
  • Shortists should stay sidelines.

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