STI Trading Towards 1600

The STI closed below support at 1718 yesterday and should be trading in the 1718 to 1600 range from now on. With the S&P 500 closing sharply lower on 20 January 2009, there are two likely scenarios for STI which trades closely with the S&P 500. The first, is for a minor one to two day up move, as the equity market digests the recent drop and the second, a sharp move down, bringing the STI near the 1600 level. The STI should continue trading lower either way, unless it rallies above 1760 in which case, we will have to reassess the situation.

The S&P 500 declined sharply and closed below major support at 818, despite an upbeat speech by the newly inaugurated US President. From a sentiment perspective, this can be interpreted as a decline on good news. Markets are ‘supposed’ to rally on good news, hence the discounting of good news indicates to us that the market is bearish and should continue to push lower.

From a technical analysis perspective, the S&P 500 has closed below 818, which is major support. We can view support and resistance bands as a series of steps. Previously, the S&P 500 was trading in the ‘step’ between 857 to 818. Now, closing below 818, it now trades in the ‘step’ that goes from 818 to 741.

We have already tested the October 2002 low of 768 last November and rallied off it. Whatever buying that has taken place at that level has already been used and it should no longer be support. For these reasons, 741 is a critical decision level. It is the bottom of the last ‘step’, so beyond 741, the S&P 500 has no more historical support. A close below 741 should be the beginning of another leg down in this bear market.

However, the move down on 20 January 2009 (most recent bar on the chart) is rather steep considering recent volatility. There is a possibility of a one to two day up move to the 826 to 830 level (50% retracement of the down move on 20 January 2009) before resuming a move down.

Technicals for the STI are somewhat similar to the S&P 500. We have closed below 1718 and are currently trading in the ‘step’ between 1718 and 1600. 1600 is considered a psychological round number, however, because there has not been a lot of activity around 1600 can be considered minor support. A close below 1600 will take the STI to the next trading range between 1600 and 1473.

1473 is an important low. Should the STI maintain a close below 1473, the next leg of the bear market should resume. In this case, the next price target would be between 1225 (September 2001 low) and 1170 (March 2003 low).

We reiterate from last week’s technical piece, “The CRB currently represents growth that is essential to push equity markets higher”. The reverse holds true as well. On 20 January 2009, the decline in the CRB was in the same direction as the equities markets and we can observe that this relation also holds for the STI, with the STI closing lower yesterday.

The CRB is approaching 208, which is a critical support level (previously mentioned). At the 208 level, the CRB might test and rally off support for a few days. Should this happen, equities might see a few up days together with the CRB, and at very least, a rising CRB would slow down any decline in equities. Beyond 208, the next historic support level is 183, the October 2001 low.

Equity markets are inching closer to their recent lows, continuing to decline in tandem with the CRB Index. Short-term momentum is down, however, on a daily timeframe, there is still no good risk to reward ratios for either the indices or the component stocks. As mentioned above, both the STI and S&P 500 have ‘shifted gears’ to trade in the support and resistance zones closer to the recent lows.

The recent lows for the S&P 500, STI and CRB are critical numbers to watch for at this point in time. A steady downtrend will very likely resume when all three markets close below their recent lows, at which time, we will be looking out for individual stocks as potential short candidates.

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