I'd decided to take a closer look at the STI to see if there is anything that is useful from there.
Over the last 12 months, there has been 2 occasions where the STI is trying to move below the 200SMA. The first occurrence was in June 2010. This was quickly taken back with a strong rally of about 750 points until Nov 2010. The second occurrence was in Feb 2011. The recovery was not successful and resulted in recent sell down in Mar 2011 assisted by the natural disaster in Japan.
On the shorter term, since year 2011, the market has been embarking on a correction path.
Using Elliott Wave (I am not an expert on EW), we can say that it is Wave ABC, the correction path. That means, the next move will be reset to wave count 1 (EW1), which means resuming the upward climb. In that case, the magnitude of the climb could be around the size of previous pattern or around 750 (2650-3300) - a major move as seen from Jun 2010 to Nov 2010.
However, basing on the chart pattern, there is also a possibility of further down trend since the 3-month trend is down. Using trend line method, there are 3 important points to take note. One, the chart is making lower low and lower high in last 3 months. Two, it failed to break out from the resistance Level 2 during the last counter trend rally. Typically, a failed move will result in bigger move in the opposite direction. Three, it has recently broken the support Level 1 (now become resistance Level 1) with the help of Japanese Nuclear crisis and Tsunami. Of course, one can argue that event 3 cannot be counted since it is extraordinary event. The sell down is due to knee-jerk reaction. Market will quickly recover from there. If this is true, then, we will wait for next week to see if the market really recover and overcome resistance Level 1 easily and convincingly. If that happens, I think we can be convinced that this is Wave C and we will be having Wave Count 1 coming up.
In essence, next week will be a critical week to observe the direction. This will give us a clearer picture whether the recent sell down was due to knee-jerk reaction or the Japanese disaster was just and "excuse". If the latter is true, it means that the sell down will happen regardless of the Japanese disaster. To verify that, we need to see if the STI can clear the Level 1 resistance easily.
Key fundamental factors in STI:
1. IPO of GLP & HPH Trust - mopped up large portion of liquidity (-)
2. Economic still growing strong (+)
3. Valuation become less attractive to foreign funds - funds pull out (-)
4. Inflation fears (-)
5. China internal consumption increase (+)
There are positive as well as negative factors.
Looking back at the 2008 market crash, we may learn something from there.
Based on the 2007 pattern, the first warning sign happens between mid July to mid August 2007 where the market drop over 20% within one month. This was followed by very strong recovery over the next 3-4 months. Then, there is second major drop which saw similar pattern of over 20% decline within a month. Again, there is strong recovery which is short live this time. It lasted less than a month and it gave way again. Then next bounce we can call it dead cat bounce that lasted for just over a week. Then the down trend is confirm and there is no doubt about it anymore. To say that the 2008 crash came suddenly is not exactly accurate. It did give some signals along the way. We can only say that we did not notice those signals until after the fact. Given such a back drop, we may want to approach the next few weeks trading with more care and closer attention.
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