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Technical Outlook (STI)
Trend Spotting | 15 May 2009
By: Xavier Lim
Articles (51) Profile

A well-known technical analyst once said that it is impossible to predict the exact month, week or even day that the stock price will rise or fall because the market is a complex system that takes into account many factors, such as political issues, product and service trends, emotions, etc. However, through the use of charts and technical indicators, investors are able to gauge where and when the market is going and spot the next trend as it emerges in order not to fall into the trap of buying high and selling low.

In our previous “Trend Spotting” in December 2008 (issue 347), we mentioned that “the S&P 500 is likely to rebound in the next 2 months (a dead cat rebound) and hit the 38.2% Fibonacci resistance (around 1050), after which, the index is likely to form a small knoll and continue its fall.” We also stated that “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 (around 2350), a head-and-shoulder pattern could be on the cards.”

Some of my peers pointed out, quite correctly, that my analysis then was incomplete. I should have also looked to see how the weekly charts have behaved, so that we can gauge the mid-term outlook of the S&P 500 and STI, even though our forecast for the rebound was quite close to the actual rebound (S&P 500 and STI started rebounding on 9 Mar-09).

Mid-Term Outlook
In this issue I attempt to fill in the gap. Let us focus on the STI’s behaviour using a 5-year period weekly chart.

We can clearly see from the 5-year period weekly chart that the STI has broken its resistance trendline.The STI stopped its fall at around 1500 to form a support line and subsequently formed a ‘W’ shape to break the resistance trendline.

Looking at the formation of the 5-year period weekly chart, for the STI to reclaim its 50% Fibonacci resistance level at around 2350, it takes only a bit more effort. A test to the 38.2% Fibonacci resistance (around 2700) seems highly possible this time (if there is no major fundamental disruption during these few weeks).

However, we still maintain our view that this rally is just a dead cat rebound as it resembles the final phase of a primary bear market (refer to “3 Phases Of Primary Trends” in issue 353). We still believe that the STI could form a head-and-shoulder pattern at around 2700 instead of the 2350 level.

Having said that, we suspect that this rally, which may hold for several more weeks or even months (some zig-zag patterns along the way), is likely to form a lower 3rd peak and then trend downwards again.


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

Please click here for more information about this author.

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