Downside looks limited at this juncture

by KEN TAI CHEE MING,
technical analyst
KELive Research (21 Oct)

But the long-term downtrend for ST Index remains

OUR long-term view of the Straits Times Index (STI) has not changed; we maintain that the STI will likely consolidate around 1,665. For short-term traders, a trading window may now open up, given new peaks attained by the VIX index, which measures expectations of near-term market volatility.

Since the VIX index was made available by Prof Robert E Whaley, it has never exceeded 80 points. Even in crisis years such as 1998 and 2001, the VIX only managed to hit 49. Our optimism for a bear rally occurring is also supported by several technical indicators.

The RSI moved into an extreme oversold range in the first week of October. If the RSI holds above 19, a bullish divergence will be formed.

At a secondary level, the plus directional movement indicator remains below the minus directional movement indicator. The ADX is also declining, suggesting that negative momentum is easing.

In all, we believe that the downside is limited at this juncture as negative news is priced into the market, at least in terms of the economic fallout from the credit crunch.

Notwithstanding that, the long-term downtrend is not over. As the recession gets underway, the market will again adjust its sentiment based on the state of the economic data.

As oil and commodities trend lower, related stocks are also reflecting the downtrend. We see further weakness in STX Pan Ocean and Mercator as the Baltic Dry Index goes near six-year lows.

-Research Report by KEN TAI CHEE MING,
technical analyst
KELive Research (21 Oct)