Odds of bearish reversal in Straits Times Index getting higher.

Odds of bearish reversal in Straits Times Index getting higher.
Odds of bearish reversal in Straits Times Index getting higher.

It was another range week for Straits Times Index as the market continues to trade cautiously. During the start of the short week, there wasn’t much action in the market as there was lacking of catalyst to trigger any strong movements in the market. The trading range was between 3200 – 3225 levels. It was only when there was strong bullish closing by US market on Wednesday night that caused some strong movements in STI. The reaction was seen on Thursday where STI performed a strong gap up opening which pushed STI to as high as 3262 level during the day. However, this strong bullish movement did not sustain well on Friday as the market returned most of the gains it had made. Hence, Straits Times Index ended up with only 17.01pts up. Closing at 3226.48 level.

STI has been trading within this sideways range for the past 2 months. In this new month of July, will STI be able to get out of the range?

Let’s examine the chart for clues.

Trend: Uptrend formation, 20 wma up, MacD above 0.

Support: 3190, 3100 (20 & 200 week MA), 2960 (50 week MA)

Resistance: 3270, 3350, 3450

Observations:

Candlestick – Short white candle with long upper shadow.

Histogram – Many Rs. Bearish crossover formed. Bearish divergence.

RSI – At 62.9%. Not overbought.

Stochastic – At 35.9%. Out of overbought.

Bollinger Band – Close to mid band. Band contracting.

Conclusion:

It was another week where STI attempted to trade lower by trading close to its support at around 3180 level. To be more precise, I have decided to adjust the support to 3190 level as 20 week MA line starts to ascend. This means that this support can only get much stronger as time passes. The candle pattern starts to turn white last week. This candle pattern indicates that the support level is holding well. However, the long upper shadow shows the reluctance of buyers to go further than 3270 resistance level. Another observation that I have noticed is the declining volume during the rally since early this year. This might be an indication of weakness in the uptrend currently. Further readings from the indicators will give clearer directions.

 

The mid-term indicators continued to be on the bullish zone but they are now running the risk of reversal towards the bearish side. MacD confirmed its bearish crossover which can possibly reverse the trend. Furthermore, with clear bearish divergence in both Histogram and RSI, it is more likely to see a trend reversal in the mid-term. Shorter-term indicators continued to trend in the bearish side despite a bullish closing last week. This means that the market is still lacking of bullish conviction which can lead to further bearish movements.

 

Hence, from the indicators, the momentum currently seems to be skewed more towards the bearish side. Immediate strong support of 3190 might be threatened to be test again for this week. But due to its confluence with the 20 week MA line, it will likely to be a tough nut to crack. Therefore, there might be strong possibility of STI staying above 3190 level this week. And, of course, if this support level fails to hold on, bearish implications will be confirmed. STI will then be seeking its next support at 3100 level instead. Testing of 3100 support will also mean that the uptrend movement is compromised, thus, a reversal in trend; confirming all the bearish divergence signals.

 

Although the odds of the bearishness are getting higher and higher, the underlying momentum is no doubt still bullish. There might still be bullish attempts to push STI higher. However, its resistance at 3270 seems to be another tough level to crack. But if STI is able to crack this resistance level, it will mean that all the bearish divergence signals have failed and uptrend will have resumed. Resuming uptrend will lead STI towards its next resistance of 3355 level. In order for such scenario to happen, trading volume must start to increase strongly so that the bullishness will be sustainable.

 

In conclusion, the odds of bearish reversal in the uptrend Straits Times Index are getting higher and higher. Key support of 3190 level will help us to determine if STI’s uptrend will be sustainable. This support level might be tested again this week. Breaking this support will lead to bearish consequences which can go as low as the next support of 3100 level. There are still bullish opportunities for STI currently but it will likely to be capped by its resistance at 3270 level. This rebound will only lead to a range trade of between 3190 – 3270 levels for STI.

 

What to watch out for this week:

1)      Testing of 3190 support level.

2)      Breaking of 3190 support level.

3)      Testing of 3100 support level.

4)      Testing of 3270 resistance level.

 

 Trading strategy to adapt right now:

-        Long traders to stay cautious.

-        Shortists to watch the outcome of bearish movement.

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