The Capricorn Effect — the tendency of the market to rebound from mid-/late December into the New Year — has come slightly early. It has helped the Straits Times Index rebound off its 200-day moving average at 2,973 quite smartly. Usually, the Capricorn Effect sees the market bottoming in December rather than November, and rallying in January towards Chinese New Year. In 2013, Chinese New Year falls on Feb 10, so that leaves several weeks for the market to rally.
Technical indicators suggest that the Capricorn Effect of 2012/13 may be somewhat choppy. Although annual momentum is attempting to rise, the longer two-year ROC has not turned up, which may mean the STI trades in a range, and stays resilient, rather than trends up in a clear advance.
In the meantime, punters are on the lookout for profitable trades. Locally listed stocks with exposure to Chinese real estate — not necessarily residential — appear to be gaining relative strength. This trend could continue. CapitaLand, CapitaMalls Asia and CapitaRetail China Trust are in uptrends. Ying Li International, Yanlord Land Group and even Treasury China Trust are gaining strength.
The US market remains in a rally phase, but resistance stays at the 13,000 mark for the Dow Jones Industrial Average. The four-year Presidential Cycle works against a rising US market. Equities usually decline in the 12 months after a presidential election.
The Hang Seng Index (21,922) is now challenging resistance at 22,000, a level that was tested in October (22,149). A successful break above this level would indicate a new upside objective. Initially, 22,500 should provide the next level of resistance. The 50-day moving average at 21,328 is acting as a support line.
VIX FINDS SUPPORT AS DOW FACES RESISTANCE
The Volatility Index (15.51) appears to have found support near current levels. The chart pattern continues to resemble a base formation. Since indicators are hovering around the low end of their range, a rebound could materialise next week (Dec 3 to 7). Resistance is at 19. The VIX is indirectly proportional to the Dow, that is, if it weakens it is good for equities.
The Dow (12,875) is likely to meet with resistance soon, at 13,000, the neckline of a top. Just before the US presidential election on Nov 6, the index broke its neckline support. The 200-day moving average is at 12,993, a level that may also provide resistance. A pullback could occur shortly, in which event support is at the June low of 12,101.
The Standard & Poor’s 500 (1,409) is stronger than the Dow, having moved above a resistance at 1,400, and its 200-day moving average at 1,384. Resistance appears around 1,440. When the decline resumes — the Presidential Cycle is against a sustained uptrend — support appears at 1,350.
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