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Volatility Picks Up = More Trading Opportunities
Perspective | 11 August 2014
By: Ernest Lim
Articles (134) Profile

As I have mentioned two weeks ago, markets seem toppish. For the past two weeks, Asian markets excluding China and Hong Kong markets slumped due to concerns on surging geopolitical risks such as Russia / Ukraine, Iraq etc. (See Table 1 for the indices’ performance over the past two weeks)

Table 1: Indices’ performance over the past two weeks

Source: Bloomberg; Ernest’s compilations

S&P500 Index
Two weeks ago (i.e. 25 Jul), I mentioned that S&P500 (it was 1,978 on 25 Jul) was unlikely to breach 2,000 in the next two weeks due in part to the low ADX and ongoing bearish divergences in the indicators. Since 25 Jul, S&P500 did not close above 1,978 and fell to an intraday low of 1,905 before closing at 1,932.

On 31 Jul, S&P500 broke below the uptrend line formed since Nov 2012 and has not closed above it as of 8 Aug. This is a bearish development. In the next two weeks, we would have to observe whether S&P500 can close solidly above the region 1,945 – 1,953. Based on Chart 1 below, this region is a confluence of several resistance levels such as 21D EMA, 50D EMA, 23.6% Fibonacci retracement, uptrend line and historical resistances. In my opinion, the probability of a strong sustained close above the aforementioned region 1,945 – 1,953 is low.

Near term supports are at 1,905 / 1,895 / 1,884. Resistances are at 1,945 – 1,953 / 1,965 – 1,970.

Chart 1: S&P500 – probability of a strong sustained close above 1,945 – 1,953 is low

Source: CIMB itrade complimentary chart (8 Aug 14)

Hang Seng Index
Two weeks ago, I wrote that Hang Seng’s chart might have formed a hammer but we would have to see whether there was follow through selling. The hammer formation was invalidated after Hang Seng continued to push higher.

Hang Seng remains one of the strongest charts with relative strength. Although there seems to be some profit taking, the trend for Hang Seng (likely) remains up. RSI is not overbought, notwithstanding the stellar performance of the index performance since May. (See Chart 2 below)

Near term supports and resistances are at 24,038 – 24,164 / 23,803 – 23,835 and 24,505 / 24,931 – 25,000 respectively.

Chart 2: Hang Seng remains one of the strongest charts

Source: CIMB itrade complimentary chart (8 Aug 14)

Straits Times Index
Two weeks ago, I mentioned that STI might see some profit taking or consolidation given the overbought RSI. It reached an intraday high of 3,388 on 31 Jul before weakening approximately 100 points to close at 3,289 on last Fri.

RSI has dipped from 72.1 on 25 Jul to 42.0 on last Fri. There is likely to be some technical rebound in the next few days. However, it is noteworthy that the 21D, 50D and 100D EMAs seem to be turning downwards. It would be good if the EMAs can stop their downwards turn and move higher, else it does not bode well for the longer term chart development of the STI. (See Chart 3 below)

See STI supports and resistances below.

Chart 3: STI may see some near term technical rebound

Source: CIMB itrade complimentary chart (8 Aug 14)

U.S. Market outlook
For the past few weeks, I have been reiterating my cautious stance on the U.S. market as I see limited catalysts for a continual rise above 2,000 without some form of profit taking.

Looking ahead, there may be a small technical rebound especially after the slump in the U.S. markets. However, I would be extremely cautious. With the ongoing geopolitical risks, Ebola disease and some nagging concerns that expectations for interest rate hike may be sooner rather than later, coupled with a deterioration in the U.S. indices’ charts, I do not see much impetus for a near term push to 2,000. Instead, the downside risks in the next 1-2 months outweigh the upside risks.

Singapore Market outlook
For the past two weeks, I have taken a nimble approach in my portfolio management. I took profit on some trades while cutting loss on one trade. (i.e. not all trades make money. The keys points are to ensure losses are few and small in magnitude relative to gainers and be disciplined to act according to plan).

For the past two weeks, I have increased my equity allocation as some stocks have weakened in line with the market. As the results season goes into full swing next week, I may go above 100% invested (via CFD) to trade on specific companies which are releasing results next week. Nevertheless, given that these trades are event driven, I am likely to close such trades in a couple of days to 2 weeks’ time.

Please note that I am putting my equity allocation above just for discussion purpose. Due to my work nature, I can change my equity allocation quickly. Everybody is different in terms of returns expectations, risk profile, portfolio size, commitments, market outlook, stock preference etc. As such, everybody’s allocation in equities differs.

In addition, it is noteworthy 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 near term supports and resistances are:

Current: 3,289

Support 1: 3,261

Support 2: 3,234

Support 3: 3,223

Support 4: 3,186

Resistance 1: 3,311 – 3,318

Resistance 2: 3,339

Resistance 3: 3,367

Resistance 4: 3,388

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

*Summary of Economic Calendar for the Week ahead (SIN time)

11 Aug, Mon: (CNY) **New Loans / M2 Money Supply;

12 Aug, Tues: (EUR) German ZEW Economic Sentiment;

13 Aug, Wed: (JPY) Prelim GDP q/q; (CNY) Industrial Production y/y / Fixed Asset Investment ytd/y / Retail Sales y/y; (GBP) BOE Gov Carney Speaks; (USD) Core Retail Sales m/m / Retail Sales m/m / FOMC Member Dudley Speaks;

14 Aug, Thurs: (EUR) German Prelim GDP q/q / Europe Flash GDP q/q; (USD) Unemployment Claims;

15 Aug, Fri: (GBP) Second Estimate GDP q/q; (USD) PPI m/m / Core PPI m/m / Empire State Manufacturing Index / Industrial Production m/m / Prelim 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.

**New Loans / M2 Money Supply are tentatively scheduled to be released on 11-14 Aug.

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

Happy National Day!

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

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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