STI is overbought, retracement is in the cards.

STI is overbought, retracement is in the cards.
STI is overbought, retracement is in the cards.

STI started the month of July with a bang as the EU starts to propose economic measures to save the current economic crisis in Euro zone. Market participants’ confidence grew as many expected the crisis to ease over time and started to enter the market in hope of more rescue packages to be implemented. Buying strength was seen to be euphoric as STI was up for 8 consecutive days. This buying strength has helped STI to close at 2978 level with 100.1pts higher for the whole week. It was indeed the most bullish week for this year. Despite such strong bullish movement, STI’s trading volume started to temper off for the last 3 trading sessions. Is this a sign of bullish fatigue? Will STI be retracing soon or will it still have much more upside room to go for this week?

STI’s chart will give us more answers to the questions.

Trend: Uptrend, 20ma poise up, MacD above 0

 

Support:  2950, 2910(100ma), 2850 (20ma, 50ma & 200ma)

 

Resistance: Gap resistance between 2950 - 2980, 3000, 3030, 3070

 

Observations:

Candlestick – White candle

Histogram – Many Gs. No bearish divergence yet.

RSI – Around 80%. Overbought. No bearish divergence yet.

Stochastic – Around 95%. Overbought. Possible bearish crossover seen.

Bollinger Band – Out of Upper band. Band opening up.

 

Conclusion:

STI managed to break of 2 resistance levels last week, namely, 2910 and 2950 levels. Breaking of these 2 resistance levels confirms that STI’s trend is certainly uptrend and will be sustainable going forward. Currently, it is also trading above all the MA lines and this indicates that whatever retracement movement that it might be facing, they will have good support from the MA lines. Breaking above all the MA lines has another advantage, upside movements now will also face lesser strong resistance which will allow STI to climb higher without more hindrances. Indeed, STI’s uptrend will continue. However, an uptrend movement is a series of higher highs and higher lows. STI’s 8 days of upward movement might be ready for a retracement to form its higher high formation. It is hard to be certain whether the higher high will be forming now, but the indicators should give us hints on whether it will happen soon.

 

The mid-term indicators continued to show bullishness after last week’s bullish momentum and they have yet to show signs of fatigue yet. This means that STI’s uptrend is still sustainable even if there are any short-term retracements. The short-term indicators were too showing bullishness but were showing signs of overbought. RSI, Stochastic & even Bollinger Band indicates that STI is overbought which indicates that the chances of retracement are getting much higher. With a possible bearish crossover seen in the Stochastic, it might indicate that STI’s short-term upside is already limited and retracement is very likely to happen this week.

 

With strong retracement possibilities from the short-term indicators, we should determine if STI is now trading at resistance level for a proper higher high to form. Although STI had managed to break 2950 where higher high is expected to be formed last week, STI is still facing gap resistance currently. The gap resistance is a fairly large one ranging from 2950 – 2987 level. STI’s last few days’ of upside movement could be an upside action to close this gap resistance. Hence, the possibility of STI forming a higher high formation currently is still high. However, due to such bullish short-term momentum, STI can still have a chance to test the next resistance level of 3000.

 

However, due to the extreme overbought condition, it is unlikely that STI can break this gap resistance. Therefore, support levels should be identified to determine where will be a good level to initiate long positions. Currently, STI’s immediate support level stands at 2950 level after it had broke out of this resistance last week. However, much stronger support level for STI is at 2910 level where 100ma support line will likely to re-enforce the support. If this strong support at 2910 fails to hold, there is a possibility of a deeper retracement to as low as 2850 level. 2850 will most likely be the floor for this retracement as it is the strongest support level for STI currently.

 

In conclusion, it is now more certain that STI will start a retracement this week. With clear indications of overbought, STI’s is very unlikely to go beyond the gap resistance of 2950 – 2987 levels. Therefore, STI is expected to test various support levels for this week. STI will likely to test 2950 support this week. However, 2950 unlikely to hold well as a support as it is a weak support level. Hence, STI is more likely to test 2910 level where it confluences with 100ma. In the worst case scenario, STI might even test 2850 level, which will be the strongest support level for STI currently. These support levels will be the best opportunity to initiate long positions as STI’s current uptrend is likely to continue for another run.

 

 

What to watch out for this week:

1)      Testing of 2950 – 2987 gap resistance

2)      Testing of 2910 support level

3)      Testing of 2850 support level

4)      Testing of 3000 resistance level

 

 

Trading strategy to adapt right now:

-          Long traders should watch for support levels to initiate long positions once retracement is being seen.

-          Shortists whom had initiated counter-trend short positions last week should start to take profits once support levels are reached. New short position can be initiated if the price still yields good risk reward.

 

 

*Disclaimer:

This analysis is provided to you for general information only and does not constitute a recommendation, an offer or solicitation to purchase or sell the product mentioned. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of you acting based on this information. Investments are subject to investment risks.

Please consult your respective advisers.