- The Straits Times Index (STI), following the mild consolidation around 1694, could be poised for a near term rebound to test the 6-month downtrend resistance line near the 1849 level.
- Over the medium term, we expect the index to remain entrenched in its downtrend, possibly easing further to test the Oct 2008 low of 1474.
Overview
- Over the last 10 years, the STI has been riding on a bullish uptrend line and peaked at its all-time high of 3906 in Oct 2007.
- Since then, the STI has been in retreat. Due to the extent of the global financial crisis, it even went into a free-fall after a brief rebound in May 2008.
- Not only did the 5-month long plunge wipe out all the gains that the STI had accumulated since 2003, but it also broke below the 10-year uptrend line.
Where are we now?
- After reaching a 5.5-year low of 1474 points in Oct 2008, the index has since been consolidating within a symmetrical triangle – this is a clear sign that the market remains divided over the direction of the STI.
- While the STI managed to briefly break out of the symmetrical triangle to reach a 2-month high of 1960 (on 7 Jan 2009) on heavy volume, it failed to clear the resistance posed by the 6-month downtrend line.
- As a result, the STI has given up all its recent gains. More importantly, the STI also broke below a critical support level at 1750, which is marked by the intersection of the 10-year uptrend line, 50-Day MA and the apex of the symmetrical triangle.
- Technically, these strong support levels have turned into strong resistance levels. Should the index fail to break above these levels soon, there could be a very bearish implication to its medium-term trend.
Support / Resistance Levels
- The 50-day MA, the 10-year uptrend line and the 6-month downtrend line are the immediate resistance levels that the index must convincingly clear to signal any potential recovery in the near-term.
- However, we do expect the market to get a mild boost from the upcoming Budget 2009 and could see the index successfully retake the 1750 level. - We believe the next resistance levels are found around the 1933 support-turned resistance level and subsequently at around 2048 which is the Fibonacci 23.6% retracement level between the Oct 2007 time high and the Oct 2008 low.
- But failure to clear these next two key resistances could see the index ease back towards the lower Bollinger Band (currently around 1668), ahead of the next support at 1474, which was the low set in Oct 2008.
- We see the 6-year low of 1200 as the last line of defense.
Bearish technical indicators
- Over the past few trading sessions, the MACD has cut back down and crossed under the centerline. In our opinion, this reversal is a signal that the recent positive momentum has waned and there could be further downside risk in the medium term.
- The Accumulation/Distribution line has also been on a downtrend over the last five months, suggesting a continuous outflow of money and a prevailing selling pressure in the market.
Conclusion
- In the near term, we expect the STI to consolidate around the lower Bollinger Band before making a rebound.
-But given the bearishness of the overall picture, we do not expect any meaningful rebound of significant magnitude to take root.
- Instead, we expect the primary downtrend to persist over the medium term.
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