Straits Times Index facing correction risk

Straits Times Index facing correction risk
Straits Times Index facing correction risk

Straits Times Index faced a week of profit taking as concerns on US president Trump’s policy implementation starts to face headwind last week. Market participants made use of such opportunities to exit the market despite a strong start in the week. 3160 resistance level held firmly despite being broken for a few days. The strong gap down action on Wednesday had confirmed the bearishness and this lead to confirmation of higher high formation. The market could have closed much lower during the week but bargain hunters or possibly short sellers were buying into the market; causing STI to recover on Friday. Therefore, STI ended the week with only 26.48pts down, ending at 3142.9 level.

Many market watchers have started calling for correction movements to happen in the market. Is it true that correction will be happening? If it happens, how far down can it go?

Let’s determine from STI’s chart.

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

Support: 3100, (200 week MA), 3010, 2960 (20, 100 week MA)

 Resistance: 3160, 3240, 3350

Observations:

Candlestick – Bearish harami with hanging man pattern.

Histogram – Multiple Rs. No bearish crossover yet.

RSI – At 72%. Overbought. Heading downwards.

Stochastic – At 77.7%. Out of overbought. Bullish crossover failed.

Bollinger Band – Closer to upper band. Band expanding.

Conclusion:

Straits Times Index failed to maintain above 3160 resistance level last week. This clearly indicates that the resistance level is strong which increased the odds of further retracement movements. Furthermore, bearish reversal pattern was formed and this further affirms that the resistance level is strong. With this, there is a much higher possibility of bearish movement in this coming week. The indicators will likely to further confirm this expectation for this week.

 

The mid-term indicators did not lose its bullish momentum after last week’s bearish movement. However, the strength of the bull is definitely weakening. MacD lines continue to get closer while RSI is heading towards its overbought line. These are indications of possible retracement movements. Shorter-term indicators are a lot more obvious as they are showing bearish indications. Histogram had been indicating bearishly while Stochastic exited its overbought level. These indications are clear to state that STI is now facing shorter –term bearishness.

 

With confirmation from the indicators, it is clear that STI is likely to go for a shorter-term retracement movement. A retracement movement in weekly chart can be considered as a correctional movement in the daily chart. Therefore, it is important to identify the levels where the weekly retracement action will target. Currently, the immediate support level for STI stands at 3100 level. 3100 support level is deemed to be a very strong support level as it confluences with the 200 weekly MA line. Hence, testing this support level is very likely to happen in the coming days or weeks.

 

There are also possibilities of STI’s retracement to be deeper than 3100 level. If this happens, it will mean that STI is heading towards its next support level at 3010 level. When this happens, it will be a much deeper correctional movement for STI. Despite being bearish, it is actually healthy for STI to correct during an uptrend movement. A healthy uptrend movement suppose to have a series of higher highs and higher lows. Hence, this correction will help STI to form its higher low. Thus, creating opportunities to enter the market at a lower level before it starts to head higher again. With the underlying mid-term indicators to remain bullish, it is clear that STI is undergoing a healthy correction.

 

In conclusion, the Straits Times Index is certain to be trading on the bearish side currently. There is still room for downside movement currently. Immediate support level stands at 3100 level. This support level will likely to hold firmly for this week as it confluences with the 200 week MA support line. Therefore, going beyond this level is unlikely to happen for this week. However, if this support level breaks, do expect STI to head towards its next support level at 3010 level. When this happens, this means that STI is undergoing a deeper correction movement.

 

What to watch out for this week:

1)      Testing of 3100 support level

2)      Breaking of 3100 support level

3)      Testing of 3010 support level

4)      Testing of 3160 resistance level

 

 Trading strategy to adapt right now:

-        Long traders should stay sidelines.

-        Shortists whom can take risk can take some short positions based on breakout strategy.

 

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*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.

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