Sunday November 13 Guppy Report on STI

Sunday, November 13, 2005
INDEX BRIEFS: STRAITS TIMES INDEX - SINGAPORE

By Daryl Guppy

Last month we talked about the collapse of price bubbles. We anticipated a continuation of the uptrend when the price bubble collapsed back to the long term trend line. Instead we saw a dramatic collapse below this trend line and a dip towards support at 2190. This provided the rebound point.

Could we have foreseen this collapse? Like many traders we have spent considerable time evaluating the charts and the indicator toolbox to determine if this dramatic collapse was heralded by some pre-warning. The conclusion is that no indicator combination gave a reliable warning of this decline. Some indicators, with the benefit of hindsight could be used to identify the fall, but this is rewriting history.

The initial signals of trend collapse came with the close below the trend line. This was matched by a penetration of the long term group of averages by the short term group of averages. Traders had three days to assess these signals, but they did not indicate the dramatic collapse from 2300 to 2190. In this particular situation, technical analysis, like other analysis tools, was not successful. But this is the nature of the market. We assess the balance of probabilities, and sometimes the least probable event occurs.

The challenge for traders now is to trade the rebound from 2190. This provides many trading opportunities. These can be further leveraged using warrants. Traders will look for stocks that have well established trends where this index pullback has caused a retreat to the underlying trend.

The STI rebound point at 2190 is the resistance level that blocked index rises from April to June. Those with long term charts can see that this level also defined the top of the shoulders in the head and shoulder pattern of 1999-2000. We should never discount the importance and influence of these long term support and resistance levels. They are important features in the market and help us to understand market behaviour.

Strong support and resistance levels are those that have consistently acted in this way over many years. Weaker levels are those that have prevailed for several weeks or months, but which do not appear in this way on longer term charts.

This helps us to define the potential development of the STI rebound. The dominant feature is the long term trend line. This acted as a support level for much of 2005. Now it will act as a resistance level. This puts a cap on index rises. When the index approaches this trend line resistance point the index is most likely to retreat. The initial retreat level is determined by the short term support level at 2260. This is a weak level. It has yet to be proven so we use this as a tentative point. The most reliable support level is at 2190.

The trend line slopes upwards and this is a bullish feature. The limit to STI index rises gets higher every week. A very rapid rise in the second week of November would see resistance at 2310. A rise in the first week of December sees resistance around 2320.

This level is also the most significant barrier to further index rises because it combines two important resistance points. The first is the value of the long term trend line. The second is the resistance level created in September. This is a short term level that is not confirmed on longer term charts. However, it did cap index rises in September. When this feature intersects with the longer term trend line it suggests this level has a greater potential to block further rises. This can develop a period of consolidation with a tight trading band.

The Guppy Multiple Moving Average indicator confirms this analysis. A new uptrend cannot emerge until the long term group of averages turns up and begin to separate. Investor support is necessary for any long term trend success. The current relationship suggests that the first rebounds are most likely to be sharp rallies followed by retreats. This provides good trading environment. Aggressive investors will join strong trends at points of temporary price weakness. More conservative investors will wait until the STI is able to move above the long term trend line.

Our attention in the next few weeks is on short term rally based trading opportunities as the index rebounds.

NOTE Author holds an open position in STI ETF100

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