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FOR the week ended July 3, the STI gave up 18 points on relatively light trading. Property stocks, City Developments, CapitaLand and Hong Kong Land were the main drags on the index. This is cause for concern as these names had led the rally in March; their recent weakness may signal the start of an impending downturn.
The soft undertone of the Singapore market was also prompted by the worse-than-expected June US unemployment data (a 26-year low), five more bank closures and the weak pre-July 4 US market performance.
After three consecutive down weeks, the Dow has again breached its 200-day moving average and is now sitting atop the neckline of a head-and-shoulders formation. A downside break below 8,260 would open the floodgates for a possible test of the 7,800 level.
The market has built up such high expectations of a sharp economic recovery that any earnings disappointment arising from the upcoming corporate results could trigger a major sell-off.
We maintain the view that the STI is now in the process of completing the 'right shoulder' of a head-and-shoulders formation. Indeed, the right shoulder may have found its peak at 2,366.
If the STI breaks the 2,240 support, this could potentially drag it under the 2,000 level again. Momentum indicators such as the MACD and DMI are also flashing warning signals. MACD is now below its nine-day moving average while DM- has crossed above DM+.
Aside from the STI, other global indices such as the S&P 500, Hang Seng Index, MSCI AC World Index and even crude oil appear to be forming head-and-shoulder patterns as well. Sentiment will remain cautious ahead of the US sentiment index due on Friday and advance Q2 GDP estimate for Singapore. Next week will mark the commencement of the Q2 results season.
By KEN TAI
Senior Technical Strategist
KELIVE RESEARCH
(Part of the Kim Eng Group)
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