Possible STI Weakness Ahead, Driven by S&P 500

The STI is trading within the range of the week ending 7August09 (2700 and 2542). For there to be clear directional movement we will need to see a clean breakout in either direction. The S&P 500’s price action indicates that it might be in the midst of putting in a top. Should we see a weak CRB and a falling S&P 500, the STI should follow suit and decline as well.

Over the past 2 days, the S&P 500 has rejected the 1035 region twice. From the chart, we have 2 shooting stars in a row. Although the sessions closed flat for the day, the rejection of 1035 for 2 consecutive days indicates the inability to push higher in the short term.

The STI will have to contend with 2650 as resistance if we are to see a push to 2700. While the STI has been trading somewhat different from the S&P 500, we cannot ignore the potential topping formation that is present in a major index such as the S&P 500.

We would ideally like to see a divergence top in the STI as well via a push to 2700. This would give more confirmation that the STI might be correcting soon. However, with the potential top in the S&P 500, there is a possibility we might not see a STI top materialise.

For now, we will have to pay attention to the S&P 500 to see if it can confirm the divergence. A strong drop off in the S&P 500 should add pressure to the STI even though their correlation has not been very strong lately.

This also implies that 2700 is key resistance and 2542 key support.

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