General theme for 2012

Good day all,

Today, I shall post my view on the equity market for the year ahead. I was quite bullish last year, but sadly the STI decided otherwise and ended up down 17%. Nevermind that. My long-term analyses are just to give me a broad overview/forecast of what I see on charts presently, and what I am expecting to see. I do not trade or invest based on my long-term views as I prefer short-term trades where I can be more flexible in cutting losses or taking quick profits and such. I believe it is imperative for short-term traders to also zoom out of daily/intraday charts and take a good bird’s eye view of the market once in a while. So, what better time to do that than in the first several days of the beginning of the year?

In the chart below, you will see a weekly chart of the STI ranging from the middle of 2006 to where we are now. In general, 2009 was a fantastic year; 2010 was a testing one, though bulls who rode out the volatility won; and 2011 was a dissapointing one for those hoping for a continued rally (like me). Anyways, what is past remains history, which is what we see and use on the charts. Lately, I have been worried with a sign I am seeing on the charts at the moment. Before I get to that though, let us look at some fibonacci levels. I will take the high in 2007 and the low in 2009 as the 0% and 100% levels. In 2010, a support zone of 2650-2700 came out. After a strong rally in the second half of 2010, we never needed to look at 2650-2700 again. Fast forward to 2012, 2650 is the vital 50% retracement level based on the post-crash high of about 3300. So straightaway, we have two events on the chart telling us that where we are now – friday’s close of 2715 – is a very important support zone. Bring in the 200-week moving average – hovering at about 2700 presently – and we should establish this zone as very important.

Now, the reason why I am worried looking at the chart of the STI is that a large head and shoulders seems to be in the making. Where is the neckline of the potential head and shoulders? Approximately 2700.

I do not like purely speculating on patterns that are not fully formed – which means they should be confirmed with a breakout – but I will sound out the alarm and monitor a chart if I see something interesting; and here, we have a large head and shoulders. Based on basic technical theory, an upright head and shoulders should mean impending downside. But, my belief is that most, if not all, patterns can lead to both upside or downside. The trigger is to wait for the breakout. (Yes, there are failed breakouts here and there, but that is another story, and for me, I do not see it happening a significant number of times). However, most head and shoulders that are large in size – the potential one on the STI is at least 2 years old – usually signal downside. Basically, what we are actually seeing is price making a rounded top, and because of its massive size, it means a market has turned and something in the real world will trigger the collapse. Case in point: Look at the STI’s movement in 2007 and 2008. The market rallied hard coming from the multi-year bull run after the dot-com fiasco, made a top at 3800s, then dropped back down to 3000 for consolidation. What the big picture looks like is a rounded top. And such an event on the chart usually has the same psychology as an upright head and shoulders. So, once breakout is seen, we look for serious downside. Using hindsight, we can see this phenomenon unfolding from 2007 to 2009.

It does not just happen in the STI’s chart in 2008, take a look at the charts below. First, we have the S&P 500. Back in 2000-2001, the market rounded, fell below the 200-week MA and there was no turning back after that. The multi-year bull run ensued after a bottom emerged by June of 2003. Once again, the S&P 500 made another rounding top in 2007, and we all know what happened after that.

  

So, this is one tool I have learnt to use in finding mid- to long-term market reversals. So, now it seems like I am bearish on the STI for this year right? Well, the “catalyst” is the breakout. Will we see the STI break through the neckline convincingly and staying down? If we get that, then I have to say I will be on the side of those naysayers who keep harping on how we are starting to see the crack from a double-dip recession. I am hoping against all hope that that is not what we get. But if the charts tell me so, then I have no choice as a chartist but to look for some serious downside.

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