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Indices Seem Stretched But Pockets Of Opportunities Are Available
Perspective | 01 December 2014
By: Ernest Lim
Articles (134) Profile

Most Asian indices moved higher due to mostly better than expected U.S. data (such as the upwards revision in U.S. 3Q GDP), surprise rate cut by China, reiterations by Japan & Europe on easing measures etc. China led the Asian indices with an 8.2 percent increase over the past two weeks. [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 mentioned that S&P500 is still on an uptrend with likely limited pullback. S&P500 reached my cited resistance of 2,075 before closing lower at 2,068 last Fri.

Based on Chart 1 below, S&P500 is still on an uptrend. However, near term indicators such as RSI and MFI are stretched on the high side and they are showing mild divergences with price. In the next two weeks, S&P500 is unlikely to breach 2,075 – 2,100. However, any pullback may be mild with strong support at 2,000 – 2,010. Immediate supports and resistances are 2,050 – 2,054 / 2,035-2,037 and 2,075 / 2,100 respectively.

Chart 1: S&P500 seems to be stretched with likely near term limited upside 2,075 – 2,100

Source: CIMB itrade complimentary chart (28 Nov 14)

Hang Seng Index
Hang Seng closed at 23,987 on last Fri, down 0.4 percent for the past two weeks. On 15 Nov, I mentioned that there is a good chance that Hang Seng can break the consolidation range 23,550 – 24,110 on the upside in the next two weeks. Hang Seng did break out of its consolidation range by opening at 24,313 on 17 Nov, before slipping to a low of 23,252. It closed back in the consolidation range at 23,987 last Fri.

Based on Chart 2 below, Hang Seng’s 21D EMA crossed above the 100D EMA and is on the verge of crossing above its 50D EMA. If the crosses can be sustained (i.e. not whipsaws), it points to a positive medium term picture of the Hang Seng market.

With the low ADX at 16.1 (it has already moved higher from the low of 13.7 on 21 Nov), Hang Seng may continue to trade within a range of 23,200 – 24,500 in the next two weeks. Near term supports and resistances are at 23,718 – 23,758 / 23,625 and 24,300 / 24,500 respectively.

Chart 2: Hang Seng may range trade 23,200 – 24,500 in the near term

Source: CIMB itrade complimentary chart (28 Nov 14)

Straits Times Index
Two weeks ago, I wrote that STI has almost reached my measured technical target of 3,325, the technical setup looks positive and may go higher in the next few weeks. STI has jumped 1.1 percent for the past two weeks to close at 3,351.

With reference to Chart 3 below, 21D EMA has crossed all three EMAs (200D EMA, 50D EMA and 100D) and 50D EMA has crossed above 100D EMA. Such formations (i.e. golden crosses) point to a favourable medium term picture. RSI closed at 63.0 last Fri which is not overbought yet. Trend remains up but given the declining ADX, it is likely that STI may have difficulty pushing above this year’s high of 3,388 in the next 1-2 weeks.

See STI supports and resistances below.

Chart 3: STI – unlikely to cross this year’s high of 3,388 in the near term

Source: CIMB itrade complimentary chart (28 Nov 14)

U.S. Market outlook
The outlook for the U.S. market continues to be the same as per what I have mentioned for the past few weeks. Outlook continues to be buoyed by stronger than expected corporate results, mostly better than expected economic data and the monetary easing by the other economies.

S&P500 has almost reached my near term target of 2,075 – 2,100 and my personal view is that it is unlikely to breach 2,100 in the near term (i.e. next two weeks). I reiterate that although the direction for the U.S. market remains up, the largest gains may have already been made and potential near term upside is limited to around 1-2 percent. Clients who have made money in the U.S. markets can consider rebalancing their portfolios and put more allocation to the Asian markets with a long term horizon.

Singapore Market outlook
Two weeks ago (15 Nov), I mentioned that I am around 55 percent invested. I have sent out an email to all clients last weekend (23 Nov) to inform them about my outlook on the market and my reduction of equity allocation to 30 percent.

Since last week, I have reduced my equity allocation to 20 percent. Notwithstanding the recent strong performance of the indices, I am of the view that there are certain opportunities in the market to be tapped. Thus, I am very likely to raise my equity allocation, on weakness in the next few weeks to capitalise on potential Christmas / Capricorn rally and / or on earnings expectations as we head towards the 4Q reporting period in Jan / Feb 2015. (Clients have and will be notified of such potential opportunities.)

Please note that I am putting my equity allocation and selected stocks above just for discussion purpose. Due to my work nature, I can change my equity allocation and the stocks quickly and without prior notice. 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: 3,351

Support 1: 3,330 – 3,332

Support 2: 3,311

Support 3: 3,297

Support 4: 3,289 – 3,291

Resistance 1: 3,357

Resistance 2: 3,366

Resistance 3: 3,388

Resistance 4: 3,400

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

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

1 Dec, Mon: (CNY) Manufacturing PMI / HSBC Final Manufacturing PMI; (GBP) Manufacturing PMI; (USD) ISM Manufacturing PMI / FOMC Members Dudley & Fischer Speak;

2 Dec, Tues: (GBP) Construction PMI; (USD) Fed Chair Yellen Speaks;

3 Dec, Wed: (CNY) Non-Manufacturing PMI / HSBC Services PMI; (GBP) Services PMI; (USD) ADP Non-Farm Employment Change / ISM Non-Manufacturing PMI / Crude Oil Inventories / FOMC Member Plosser Speaks / Beige Book;

4 Dec, Thurs: (GBP) BOE Meets; (EUR) ECB Press Conference; (USD) Unemployment Claims / FOMC Member Brainard Speaks;

5 Dec, Fri: (EUR) Revised GDP; (USD) Non-Farm Employment Change / Trade Balance / Unemployment Rate / Factory Orders / FOMC Member Fischer Speaks;

*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.

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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