Temporary rebound possible

In the short term, oversold pressures could trigger a temporary rebound by the Straits Times Index. Resistance appears at 3,100, a psychological resistance and an old support. Whether this develops into a relief rally remains to be seen but at this stage, that appears unlikely as the chart pattern remains weak. An earlier break below 3,187 indicated a downside of around 3,000 and this will likely be attained before the STI is able to stage a meaningful and sustained rally. Several blue chips have also broken below supports, notably property stocks including City Developments and the local banks, which had remained resilient for much of the year.

The Chicago Board of Options Exchange Volatility Index (VIX) continues to inch higher, a sign that volatility is likely to persist. Since the VIX is inversely proportional to the equity market, a rising VIX implies lower levels for the Dow Jones Industrial Average and Standard & Poor’s 500 Index.

The Hang Seng Index (23,218) has inched below its 50-day moving average at 23,296. There is a clear negative divergence between the index and the 65-day ROC. The indicator has not broken down but appears poised to do so. Support for the index appears at 22,435. The old support at 23,700 has been breached and this invalidates the upside target of 24,400.

VIX STRENGTHENS

The VIX (15.42) continues to rally and has an immediate target of 16.20 following the break above a resistance at 14.40. Short-term indicators such as 21-day RSI have turned up and directional indicators are positive, suggesting that the VIX will likely move higher, and this is a negative development for the stock market.

US EQUITIES CONSOLIDATE FURTHER

The Dow Jones Industrial Average (15,843) was unable to hold above the psychological 16,000 level after hitting a new all time high on Nov 29. It remains above its breakout level of 15,600 though, but its chart pattern is looking increasingly like a headand- shoulders top. Moreover, the 65-day ROC has turned down, and this will likely cause the index to ease. The neckline is at 15,800, and a breakdown would indicate a downside that takes the index to below its support level of 15,600.

The Standard & Poor’s 500 Index (1,782) was also unable to hold above its 1,800 psychological resistance level despite closing above this level for a third time on Dec 9, when its upside target of 1,810 was attained on an intra-day basis. The index is moving sideways and in so doing could be forming a top. The neckline is at 1,775. A break below this level would indicate a downside objective of 1,760. Quarterly ROC has turned down and this could pressure the index in the short term.