ST Index- Wait for a decline towards 3370-3380

The recent sell down in the ST index appears to signal a trend reversal and looks noticeably different from prior pullbacks. This is because the index has broken down in a wedge formation. Our original working assumption was that the index was tracing out in a rising wedge or diagonal triangle. As of yesterday, the index had broken below the wedge formation in a broad based sell down. Unlike previous corrections, the rebounds have been muted even as downside range expands. Additionally, the SGX Finance index which represents banks has also traced out in a rising wedge formation and broken down. This again is noticeably different from previous pullbacks since March 2007, where banks maintained their uptrend.

Several key index stocks have also broken below key moving averages. At this stage, we think it is better to sell into strength instead of bottom picking. We also note that the index has yet to gap down. Typically, a breakdown from a wedge formation results in a breakaway gap. We have yet to witness that. On top of that, the 14 day RSI indicator on the ST index has not moved to oversold levels. Prior pullbacks have led to RSI indicator heading to oversold levels before a rebound takes place. We think that this will repeat. Our price oscillator model has slipped slightly into neutral territory, but suggests a further 130 point downside potential before the index stabalises. Support as such is estimated at 3370-3380 for the ST index. That attached chart shows the break down from the wedge formation and the Elliott wave count on the index.