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STI Bearish; Near Term Rebound Likely Capped Around 3,160-3,168
Perspective | 26 August 2013
By: Ernest Lim
Articles (134) Profile

For the past two weeks, Asia stocks were mixed as concerns over Fed tapering, rising bond yields and fund outflows from countries such as Indonesia, India etc affected the markets. However, this was partially offset by the good set of Purchasing Managers’ Index (PMI) data from China, Europe, Germany etc. (See Table 1)

Table 1: Indices’ Performance Over The Past Two Weeks

Source: Bloomberg; Ernest’s compilations

Two weeks ago, I mentioned that the Standard & Poor’s 500 (S&P500) was likely to be range bound with a downward bias.                                 

S&P500’s near term support is likely to be around 1,630-1,635. Rebound, if any, is likely to be capped at the rising trend line and parabolic SAR currently around 1,678. The short term trend tends to be biased downwards, unless it can climb convincingly above the rising trend line. If 1,630-1,635 fails to hold, the next significant support is around 1,598-1,608.

Chart 1: S&P – Near Term Support At 1,630-1,635; Rebound Likely Capped At 1,678

Source: CIMB itrade complimentary chart (23 Aug 13)

Two weeks ago, I wrote that the Hang Seng Index (HSI) was likely to range trade between 21,063 and 22,580. Near term significant support and resistance were around 21,500 and 22,290 respectively. On 15 August, HSI touched an intraday 2.5 months high of 22,696 before closing at 22,539 on that day. On 22 August, HSI indeed touched a one-month intraday low of 21,538 and closed 21,895 on that day (See Chart 2). Average directional index (ADX) has declined further and it is likely that HSI may be range bound between 21,063 and 22,580 in the next two weeks. Near term significant support and resistance are at around 21,500 and 22,400 respectively.

Chart 2: Hang Seng – Continues Range Bound Between 21,063 & 22,580

Source: CIMB itrade complimentary chart (23 Aug 13)

Two weeks ago, I wrote that the Straits Times Index (STI) was likely to consolidate around 3,160–3,300 amid the low ADX. However, STI was weaker than S&P500 and HSI, and broke the support at 3,160 with an intraday low of 3,055. It is likely that the downtrend persists (unless proven otherwise) as evidenced by the moving averages which started to turn down around 16 August. 21-day exponential moving average (EMA) has gone below 200-day EMA which is another bearish signal. With the recent decline, ADX has strengthened to around 23.6. It is likely that any near term rebound is likely to be limited around 3,160-3,168. Near term significant support and resistance are around 3,054-3,065 and 3,160-3,168 respectively.

It is noteworthy that in the event that STI breaks 3,054-3,065 with volume expansion, an eventual measured downside technical target is around 2,865.

Chart 3: STI Bearish, Near Term Rebound Likely Capped Around 3,160-3,168 

Source: CIMB itrade complimentary chart (23 Aug 13)

Fundamental Aspect
On the fundamental aspect, September is generally one of the weakest months (if not the weakest) especially for US shares. Besides the seasonal aspect, there are some important events to consider in September such as the Federal Open Market Committee (FOMC) meeting, debt ceiling discussions, German elections etc.

Despite the above factors, it does not mean that we bail entirely out of stocks (i.e. sell everything and be holding 100 percent cash). It means that we have to be nimble and may have to trim our returns expectations. For myself, I was about 40 percent invested on 15 August but have gradually raised my portfolio allocation on weakness to around 70-80 percent on opportunistic plays. For risk adverse readers, they can consider to be around 40 percent to 50 percent invested and review their strategy (i.e. percentage invested) after the FOMC meeting.

Do note that everybody is different in terms of returns expectations, portfolio size, risk profile, commitments, market outlook etc. I am only giving myself as an example. (Another important point is that, due to the nature of my work, I can raise or decrease my allocation rapidly.)

Notwithstanding the above neutral and bearish technical charts and the various important events to lose sleep about, there are some stocks with interesting technical setups.

Chart Analysis: Dukang & King Wan

1. Dukang Distillers Holdings

Since my writeup on Dukang in mid-April (see http://www.sharesinv.com/articles/2013/04/17/dukang-distillers-%E2%80%93-price-range-bound-since-november-2012/ ), Dukang has appreciated almost 100 percent to an intraday high of $0.65 in two months’ time, before retracing 76.4 percent to touch $0.41 in early-August. It closed at $0.445 on 23 August.

Based on Chart 4 below, Dukang seemed to be on a downtrend since early June. Significant resistance is at $0.455-0.475. If it can breach the resistance with volume expansion, the downtrend is negated. Based on chart analysis and price action, the odds seem to favour that of a breakout above $0.475. This is because

a) Price seems to exhibit “positive divergence” (i.e. it is resilient over the past four trading days, despite the weakness in the general equity markets).

b) Indicators such as relative strength index seems to be strengthening etc.

c) Full year results to be out this coming week. This may arguably provide some catalysts to push the share price higher.

Chart 4: Dukang’s Price Shows Resilience Over The Past Four Trading Days

Source: CIMB itrade complimentary chart (23 Aug 13)

2. King Wan Corporation

Based on Chart 5, King Wan seems to be in the process of forming a descending triangle. Although it is usually bearish, there are some noteworthy points.

a) Price seems to exhibit “positive divergence” (i.e. it is resilient over the past four trading days despite the weakness in the general equity markets).

b) Although the 30-day average volume amounts to 1.16 million shares a day, there seems to be relatively heavy sell queues at various levels (most of the time) from $0.320 and above. This begs the question that if the sellers (with the intention of liquidating the shares) do have that many shares, they are likely to be professionals – by queuing so many shares on each level, the professionals know that potential buyers would be deter away and selling would not occur, thus it is likely that the professionals are in fact accumulating. Furthermore, although the buy queue for King Wan looks thin, it seems rather steady and price is roughly around the same level without dropping much intraday.

Personally (although I cannot quantify this point and it is most likely not 100 percent accurate), this pattern seems to show smart money accumulating the shares. I have seen it in Guocoleisure, Ezion, Nam Cheong, Sino Grandness, China Animal, Eratat, Kreuz before. They seem to be a prelude of some upwards movement (though it may take some time to materialise.)

c) Bearish patterns, if invalidated, can have rather bullish outcomes. It is noteworthy that King Wan has previously invalidated a descending triangle pattern from February to May and it has produced a rather bullish outcome.

Notwithstanding the above points, I wish to caution that King Wan’s company developments may swing the chart either way. With reference to 1Q14 financial results, King Wan has some shares in KTIS where the formal approval to list on the Thai exchange should be given on or around 18 August. (See Nextinsight’s article for more details http://www.nextinsight.net/index.php/story-archive-mainmenu-60/919-2013/7171–king-wans-agm-greater-clarity-on-ipo-of-ktis-and-special-dividend). At the time of writing, based on SGX announcement page, King Wan has not received the formal approval yet. Failure to receive the formal approval is very likely to be bearish for the chart and vice versa.

If King Wan can breach the significant resistance around $0.325-0.330 with volume expansion, an eventual measured technical target price may be around $0.365. Conversely, if it breaches the support at $0.305 with volume expansion, an eventual measured technical target price may be around $0.265.

Chart 5: King Wan’s Near Term Resistance And Support At $0.325-0.330 And $0.310-0.315 Respectively

Source: CIMB itrade complimentary chart (23 Aug 13)

It is noteworthy that the above mentioned stocks are small to mid cap stocks and they are likely to experience a higher volatility than the blue chips. In other words, they may drop more than the market if market weakens.

 Please note that the above is my personal opinion and may not cater to your specific risk profile etc. The question of when to buy / sell and what to buy / sell differs greatly from individual to individual. Furthermore, it is extremely important to bear in mind that the market outlook is never static. It can change suddenly if there are sudden big events unfolding from the market – some events can happen as quickly as a few hours.

STI Supports And Resistances: 

Current: 3,088.85

Support 1: 3,074
Support 2: 3,065
Support 3: 3,048-3,054
Support 4: 3,013-3,021

Resistance 1: 3,104-3,108
Resistance 2: 3,118-3,120
Resistance 3: 3,135
Resistance 4: 3,150

*Supports and resistances are not static levels. They may be subject to change daily.

Summary Of Economic Calendar For The Week Ahead (SIN Time)
25 Aug, Sun: (ALL) Jackson Hole Symposium

26 Aug, Mon: (USD) Core Durable Goods Orders m/m;

27 Aug, Tues: (EUR) German IFO Business Climate; (USD) S&P/CS Composite-20 HPI y/y / CB Consumer Confidence / Richmond Manufacturing Index;

28 Aug, Wed: (USD) Pending Home Sales m/m / Crude Oil Inventories;                                                                                                                   

29 Aug, Thurs: (EUR) German Unemployment Change; (USD) Prelim GDP q/q / Unemployment Claims / FOMC Member Bullard Speaks;

30 Aug, Fri: (USD) Personal Spending & Income / Chicago PMI / Revised UoM Consumer Sentiment;

*All economic data especially China data (if any) are subject to changes without notice. The above list is not exhaustive. I have merely listed the economic data which I feel has more impact to the market.

Please refer to Forex Factory Calendar for a more detailed / up to date list of economic events.

Information sources: Various sources such as Bloomberg, Daily FX, Dow Jones, Forex calendar, Zacks Investment Research, Reuters, SGX, Yahoo Finance, and Business Times etc.

All the best for your investment and trading!

Ernest Lim is a CFA, CA and has worked at GIC Special Investment. He has a solid feel of the markets and financial world and is now a remisier.

Please click here for more information about this author.


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