Will STI be able to sustain its recovery?

Published September 9, 2008
Businesstimes.com

By KEN TAI CHEE MING,
technical analyst,
Kelive Research



The Singapore market staged an impressive rally yesterday cheered by news of the US government's bailout plan for beleaguered home mortgage giants Fannie Mae and Freddie Mac. This is the biggest rescue plan in US history and it gave Asian equity markets a much-needed shot of confidence after successive weeks of losses.


Responding to the weekend announcement, the STI surged 122.82 points or 4.8 per cent in its biggest single-day move since Jan 23 to 2,697.03. Around the region, the Hang Seng Index jumped 4.3 per cent, the Nikkei rose 3.4 per cent while both the Korean and Taiwan market indices leapt more than 5 per cent. Only the Shanghai Composite and KLSE Composite ignored the positive news, slipping 2.7 per cent and 1.3 per cent respectively.

Although yesterday's STI performance may have cleared the storm clouds for now, it remains to be seen if the recovery can be sustained. To put things in perspective, the STI has clawed back two-thirds of its losses late last week and is rebounding from a deeply oversold level. Upside resistance is seen at the 2,827 level, which represents a 38.2 per cent retracement of the May-Sept correction. While the US action may have alleviated systemic risks to some extent, many large mutual funds are also heavily invested in these two government-sponsored enterprises. Their seizures by the US Treasury may potentially lead to more redemptions and possible fund closures.

Technically, the selling pressure on the STI has eased as reflected by its falling ADX. While the STI has broken our mid-term objective of 2,650 last week and touched the longer-term support at 2,554, which is also the 50 per cent retracement of the 2003 to 2007 bull run, our long-term bearish view remains unchanged. On average, a bear market will typically last about two years, which would infer that the STI should only bottom out next year.

Notwithstanding, we see some opportunities. The securities with potential corporate actions include Portek, Goodpack, SMRT and Dairy Farm.