STI: 3200 Psychological Support Holding Up July 16, 2018

 This article was published in Business Times’ column “Chart Point” on 16 July 2018.

STI Daily Timeframe                                              Source: Bloomberg, PSR

With the recently announced set of cooling measures in the property market, the selling pressure in the Straits Times Index (STI) worsened. The Singapore government announced that it is raising the additional buyer’s stamp duty (ABSD) and tightening the loan-to-valuation (LTV) limits for residential property purchases to cool the local property market and keep prices in-line with economic fundamentals. The general sentiment of the market was affected negatively as property developers and Banks were hit badly due to this new set of cooling measures. As a result, the STI fell as much as -2.4% on 6 July 2018. Nonetheless, looking at the current price action suggests a possible rebound back into the long-term uptrend due to the over-reaction by the market.

Since hitting a high of 3641 points on 2 May 2018, the STI has erased -12% to the year’s low of 3176 points on 6 July 2018. That sharp selloff initially broke price below the crucial 3200 psychological support area. However, that bearishness appeared short-lived as the bulls immediately defended the 3200 psychological support and regained ground by closing at 3233 points on 9 July 2018. 6 July 2018 was the only day where the STI closed below the 3200 psychological support area suggesting for a possible false bearish breakout.

The 3200 psychological support area is particularly important as it has been keeping the uptrend intact since May 2017. There were seven attempts by the sellers to turn the trend bearish but each time failed miserably as the 3200 psychological area halted the selloff. The strongest rebound off the 3200 psychological support area came in September 2017 with the STI moving back into the long-term uptrend and rallying 8.2% over the next three months.  Thus, it is no surprise that the bulls are once again defending the 3200 psychological support area after the recent sharp selloff. Keep in mind the 3200 psychological round number also coincides with the 200-week moving average making it a more reliable support area.

In addition, the Relative Strength Index (RSI) has also been oversold since 14 June 2018. RSI measures momentum. A reading above 70 represents overbought condition while a reading below 30 represents oversold condition. The RSI recently hit an extreme low of 23. Therefore, it will just be a matter of time before a rebound happens. More lights are shed with the recent bullish price action. After testing the 3200 psychological support area, the subsequent bullish rejection has lifted the RSI back above the 30 oversold region suggests the start of a mean reversion higher for the STI. Our historical study on oversold RSI mean reversion suggests a rebound higher is always likely to happen after the RSI dips below 30 oversold region. An average rebound of 5% tends to happen after the mean reversion signal is confirmed when the RSI rises back above 30 oversold region.

Zooming in deeper also shows a bullish breakout above the immediate downtrend line suggests further sign of strength.

All in, it seems likely that the 3200 psychological support area will hold up once again to keep the long-term uptrend intact. Coupled that with the recent bullish rebound and break above the downtrend line and oversold RSI mean reversion, the STI looks likely to revert back into the long-term uptrend to target the 3341 resistance area followed by 3462.

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Jeremy Ng
Investment Analyst
Phillip Securities Research Pte Ltd

Jeremy specialises in Technical Analysis and has 10 years of experience in studying price action. His areas of expertise include intermarket analysis on the equities, currencies, commodities and bonds market.

He is also a regular columnist on The Business Times - every Monday ChartPoint column.

He graduated with a Bachelor of Science in Banking and Finance from University of London.

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