STI testing 2424 high

The recent rally has been rather sharp and we are beginning to see profit taking come into the markets. STI found support around the 2400 hundred mark after closing the opening gap yesterday. We are looking for a strong close above 2424 for the STI and also the inter-market confirmation via a weak Dollar and strong CRB.


S&P 500, Daily, 15 July 09



The S&P 500 formed a head and shoulders top with a momentum divergence. It tested the 879 neckline but failed to close firmly below it.

Over the course of this week, we have seen a sharp rally off 879 and closed above resistance at 930 on 15July09's trading session. The inability to decline despite a head and shoulders top and momentum divergence, in addition to risk aversion indicated by a rally in Yen and Bonds (US 10 Year Note) indicates that strength should be present.

However, this rally might be sentiment driven due to the positive earnings season and we would like to see a close above 956 to confirm the trend is resuming upward. Until then, our stand remains neutral.


STI, Daily, 16 July 09



From the chart, we can see that the STI has broken out of its consolidation range and has rallied sharply.

On 16July09, the STI gapped to its recent 2424 high and closed above it within the first hour. However, on the intra-day charts, the past 3 days of run up have been parabolic, and parabolic trends are very seldom sustainable.

For this trend to be sustainable, the STI should find support between 2424 and 2400 and resume a more gradual uptrend from there. Gradual trends are more sustainable, parabolic trends are not.

It is important to see the inter-market elements confirm the equity market (STI) trend via a stronger commodity market and a weaker US Dollar. Ideally, we would also like to see the Yen and Bonds continue to weaken as an indication that risk appetite is coming back to the markets in general.


CRB Index, Daily, 15 July 09



After consolidating around 231, the CRB closed higher on 2 consecutive trading sessions. On its own, it probably would be too early to tell whether this would be a continuation of an uptrend.

However, from an inter-market perspective, we see a rally in equities and the Dollar Index declining (next page). This might be the continuation of the inter-market trends, namely, weak Dollar, strong commodities and strong equities. We are watching for the continuation of these inter-market relationships as an indicator that equities have room to run.

We would like to see the CRB test and close above resistance at 244 to confirm that there is still strength in the CRB.


US Dollar Index, Daily, 15 July 09



The Dollar Index made a firm closed near the lows of the session on 15July09. It is probably breaking out of the consolidation that begun since early June09.

The Dollar is an important component of the inter-market picture. Should the Dollar break out of its consolidation and resume a down trend, the equity and commodity markets should begin to have a firmer directional movement as well.

Support for the Dollar Index is at 78.33 then 77.68.




Conclusion
We saw a "flight to quality" in the past few weeks. I.E: (1) A sharp rally in Yen, and (2) bonds and (3) the commodity market selling off strongly. This, in light of a (4) head and shoulders top in the S&P 500, German DAX and momentum divergence in the STI led us to be inclined towards the view that money was fleeing out of risky assets into "safe" assets.

Putting these 4 factors together, what the market was telling us in essence was that hot money was fleeing out of risky assets into "safe" assets. This was the markets telling us that a decline was the most likely scenario.

We mentioned last week that we were waiting for equities to begin pricing in risk aversion. However, the stock market indices failed to decline despite the risk aversion scenario and instead rallied very sharply in the past 2 to 3 days.

The inability to decline indicates to us that there is likely to be underlying strength present in the equity markets, STI included. However, we would like to see this confirmed by a strong close above recent highs for the S&P 500. The STI should also trend consistently intra-day, as opposed to the parabolic movements we have seen in the past few sessions as well.

If the STI closes firmly above 2424, investors can consider initiating light long positions while waiting for the S&P 500 to close above 956 and also for the intermarket elements to begin trending.

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