Straits Times Index – Perspectives
Synopsis
The S&P 500 Index is being used as a proxy for the STI. Our study has shown that the STI and S&P 500 are well correlated. The higher liquidity of the S&P 500 gives us a clearer picture of technical price formation versus the relatively illiquid Straits Times Index which experiences opening gaps a lot more frequently. The S&P 500 being greater in market capitalization and trading volume has been 'leading' the smaller Straits Times Index and gives a clearer indication of the Straits Times Index's direction.
The Big Picture
S&P500
Source: Bloomberg
Straits Times Index
Source: Bloomberg
During the first quarter of the year, both indices consolidated at the same time starting from mid January to mid March 2008, forming convergence bottoms – Price traded lower while the RSI (indicator of momentum) moved higher – signaling that momentum was likely to push prices upward. As a result, we have since seen the market rally off from the bottom formed in Q1.
Please draw your attention to the similarity in timing and price action of the consolidations for both the indices – the first down leg was seen in January followed by a long consolidation in February the first half of March before pushing down another leg toward the end of March. Both Leg 1s show the market rejecting the price level in the form of long tailed candles and both Leg 2s show minor consolidations – these are indicators of the indices trading in tandem.
The current rally we are seeing rose from a bottom that took 3 months to form and it is thus unlikely that it will end in 3 months – generally the time taken for the market to rally is longer than the time taken for it to consolidate. However, the current rally has lasted for 3 months straight and we are currently due for a technical correction.
The intermediate trend is still up, but the short term is currently trending down – a 'healthy correction'.
Trading In Tandem – A Closer Look
S&P 500
Source: Bloomberg
Straits Times Index
Source: Bloomberg
Notice that the recent short-term tops and bottoms in the S&P (denoted in white squares) are in tandem with the tops & bottoms of the STI.
The Short-Term Trend
Divergence Top
The S&P formed a divergence top in the middle of May: Price spiked higher (forming a rejection candle, circled in white), while the RSI (indicating momentum) moved lower. I.E.: The market made an attempt to move higher, but there was a lack of momentum to follow through, resulting in prices moving lower with momentum and giving rise to the current correction. Given the high level of correlation the STI followed suit and declined together with the S&P 500. Both markets are currently trading around the 38.2% Fibonacci retracement level at the time of this report.
Our Assessment
Watch the 50% (S&P: 1371, STI: 3010), 61.8% (S&P: 1327, STI: 2947) and 75% (S&P: 1314; STI: 2878) retracement levels on the charts. Look for the market to consolidate around those levels before building a base for another push higher and the continuation of the intermediate trend.
Summary
The market took 3 months to consolidate during the first quarter of 2008. With a 3 month long consolidation as a base, it is unlikely that the current rally would end in merely 3 months.
The intermediate term trend has a high probability of still being in place, however, in the short term, the market will likely face a correction to the 50% to 61.8%, or perhaps even 75% Fibonacci level of the most recent rally. We are looking for the market to decline and consolidate around those levels before the intermediate trend continues and pushes to higher ground.
The "stop-loss" for this analysis would be if the market trades below the most recent consolidation lows: approximately 1260 for the S&P and 2746 for the STI, in which case the intermediate uptrend would be invalidated.
Research Team
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