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Straits Times 3,111.15 -16.59 -0.53%
Hang Seng 26,173.59 +124.87 +0.48%
Dow Jones 26,252.24 +49.51 +0.19%
Shanghai Composite 2,897.14 +13.71 +0.48%
Technical Outlook (STI, S&P 500)
Trend Spotting | 19 December 2008
By: Xavier Lim
Articles (51) Profile

The famous adage ‘if the US sneezes, Asia catches cold’ still holds true. The Straits Times Index (STI) has nosedived 54% since hitting a high of 3,906 in October 2007. So has Mr. Market hit the inflection point that most people are hoping for? To have a clearer picture, let us take a look into the technical charts of the Standard and Poor’s 500 Index (S&P 500) and the STI.

LONG-TERM OUTLOOK
The monthly chart for the S&P 500 over a 20-year period clearly shows a double top formation, which represents that the bear is in control and a uptrend reversal has developed. This is further evident from the 9-day moving average blue line (9MA) cutting the 18-day moving average red line (18MA) from the above on the 1st quarter of 2008. The STI, on the other hand triggered a sell signal by forming a bearish engulfing pattern (introduced in The Techniques of Japanese Candlestick 5, Issue 324), indicating a top reversal pattern.

10-year period monthly chart for STI
20-year period monthly chart for S&P 500

From the S&P 500 chart, the 50% Fibonacci support at 910 from Jan 1989 to the 18-year high on Oct 2007 (275 to 1576) has clearly been broken and has now become a resistance level. A breakthrough at 910 will lead the index to test the 38.2% Fibonacci resistance at 1058. We suspect that a doji may be formed due to the exhaustion of selling momentum after 3 months of falling. S&P 500 is likely to rebound in the next 2 months (a dead cat rebound) and hit the 38.2% Fibonacci resistance, after which, the market is likely to form a small knoll and continue its fall. The STI will most likely follow suit and form a knoll before continuing its free-fall again. If the STI is able to breach the 61.8% Fibonacci resistance at 1970 and then reclaim the 50% Fibonacci resistance level, a head-and-shoulder pattern could be on the cards.

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

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