Market players are torn between fear of a correction setting in around 2750 and hope of an immediate breakout to next historic target around 2900 during earnings reporting period starting from around mid-October.

Since the 6.7% retreat from 2701 to a low of 2521 in August, the market has seen only 2 mild pullbacks of 4% and 2.8% this month which raise concerns that another sizeable fall of 6-8% (the biggest so far was 8.8% in June) or even a 10-15% correction may suddenly appear once STI hits 2750 area.




However market behaviour does not suggest a 10-15% correction is imminent, barring the unforeseen, judging from the frequent self-corrections through profit taking among index stocks and sustained situational plays in small-mid caps without any speculative froth setting in.

Successful nurturing of strong bases at higher levels from 2400-2450 to 2500-2550 and now 2600-2650 also help to ensure the market can rebound again after a 6% to 8% pullback from 2750 area to 2500-2600.

Falling back to 2500-2600 should not derail the objective of crossing 2900 at year-end or in early 2010 (coinciding with 61.8% recovery of collapse (at 2923) from 3831 to 1455 as well as multi year resistance at 2919.

But a 12% correction to 2420 (back to June 2 high of 2425) or even worse to around 2350 could mean the STI has probably seen its year’s high around 2750 which would then only be tested at year-end at the earliest or more likely in first quarter of 2010.
This also implies that the 2900 target may have to be pushed back well into 2100.

However major triggers for a 10-15% correction are not there except for the fact that there has not been one since the market bottomed out in March and having been spared an August and September surprise players do not wish to risk their positions in case October springs an unpleasant surprise.

Short-term technically overbought conditions have been quickly erased during intra-day profit-taking and rotational plays. Medium term indicators such as monthly MACD remain bullish on top of rising 50,100 and 200 days moving averages.

But if there is a strong breakout from 2750 area to 2900 next month, it would most likely mark a market top similar to 3831 peak in Oct 2007 and a sharper correction immediately sets in.

Not wishing to be sucked in and caught wrong-footed again like in Oct 2007 and also last Oct, players are likely to be more cautious on a successful break of 2700 and when index rallies towards 2750. After all there is not much to lose between 2700 and 2750 but there is a lot to lose in the event of a breakout to 2900.

Thus torn between prospects of a correction and a breakout to 2900 players have chosen to remain invested on pullbacks below 2700 and this explains the successive higher lows this month from 2560 to 2615 and to 2631 last week and 2655 so far this week.

Sustained strength in key index stocks such as Wilmar ($6.92) which we predicted last week (at $6.44 on Sep 15) will test Aug $6.96 record high once it breaks out of $6.30-60 trading band, KepCorp ($8.55) and SIA ($13.52) is balanced out by profit-taking in banks and SGX as well as properties.

(KepCorp was at $8.17 and SIA at $13.12 on Sep 15 when we placed targets of testing $8.45 high and breaking $13.50.) This should pave the way for STI to break 2700 and test 2750 area before a pullback sets in or a breakout from 2750 to 2900 if earnings and GDP reports streaming in from mid-October are well ahead of expectations.












Disclaimer:
This report is prepared by AmFraser Securities Pte Ltd (“AmFraser”), which is a holder of a capital markets services licence and an exempt financial adviser in Singapore. This report is provided for information only and is not an offer or a solicitation to deal in securities or to enter into any legal relations, nor an advice or a recommendation with respect to such securities. This report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any recipient hereof. You should independently evaluate particular investments and consult an independent financial adviser before dealing in any securities mentioned in this report.

More

Investor Watch