Given the 2 strong breakouts on near record volumes in May which quickly demolished the 2130-60 multi year resistance and the valiant attempts to keep to the gains made all the way to 2400 earlier this month, the odds suggest that it would not be easy to bring down the market to below 2200.
STI is in middle of 2 key historic levels ie 2130-2160 and 2350-2400 asplayers weigh the risk of test of the former or return to recent highs. The current 2240-2280 trading band itself is another key historic level, providing support.
Turnovers have been much reduced in the past week or so as the index pulled back 188 points or 7.8% from 2425 to 2237 low at yesterday’s close, at the higher end of the 3.7% to 8.3% pullbacks seen soon after the March 10 bottom at 1455.
The market needs some new leads to return to 2350-2400 and apart from mid-year window dressing which should underpin the index to atleast around 2250-2300, there should be some clues as to the 2q earnings performances in the next 2-3 weeks before the all-too-often earnings watch season kicks in later in July.
We have also seen positive earnings upgrades as well as more bullish views on possibility of a V-shaped recovery but the extent of the market pricing in these unexpected changes in fundamentals which were unthinkable in 1q09, can be read in its behaviour in the July-Sept period.
If the economy which most agree has bottomed out in 1q09 together with the worst on the earnings front also behind us, definitely been factored in by the March-May surge, continue to recover bringing down 2009 GDP contraction to below -5% vs official -6% to -9% forecast, then the index rise to 2400 would have been justified.
Thus when preliminary 2q GDP numbers are announced around 9 to 14 July, there could be clearer signals that second half GDP performance would justify a significant lowering of 2009 contraction to -3 to -5%. But officially this may be known only around National Day.
Having surged 970 points, exactly two-thirds from 1455 to 2425 to early June, and recovered to the key 38.2% Fibonacci mark (2363) of crash from 3831, there should at least be another attempt to test and break 2425.
It is however unlikely that it would be a breeze but in the event there is a rally to next historic resistance ie 2480-2500 by August, players should get out first as the Aug-Oct period is notorious for market corrections or even crashes.
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