STI Sideway To Bearish Tone

US market had a bad closing last night.  Dow plunged by 243 points.  It seems like we are seeing more volatility recently.  With earnings starting to disappoint investors it is likely that the volatility will continue.

For Singapore, the STI has held pretty well.  Last Friday’s 200 points drop in Dow Jones Industrial Average did not bring about a sell down on Monday.  It will definitely be a gap down today.   So where is the support?

The first support is at 2977 the pivot low made on 6 Sep.  The next support will be at the 38.2% Fibonacci retracement level of 2938.  If 2938 gives way, the index is likely to test the 61.8% level of 2846

MACD is bearish at the moment.  Having tried to make a bullish crossover, the MACD histogram looks to be turning down.  Such pattern failure usually brings in the sellers.

One slightly positive indicator is the ADX indicator.  It is not shouting a sell signal right now with ADX below 20 level indicating that there is no strong trend pattern at the moment.  The +DI looks set to go below –DI indicator suggesting that a more negative tone is forming.

The New Depression

Credit growth facilitates economic growth.  When credit is expanding consumers can now borrow more and invest more.  Increasing consumption and investment creates jobs and boost income and profits.  Credit expansion also causes asset prices to go up.  These assets include stocks and property.  As net worth of the public goes up the asset owners can now use what they own as collateral to borrow more.  This is a cycle that feeds on itself and leads to increase spending, investment, job creation and wealth.  So long as the credit keeps expanding, the party can continue.

Between mid 2008 and first quarter of 2011, the federal government expanded its debt by $4.4 trillion.  This helps to keep the economy from breaking down when private sector became incapable of repaying its debt.   Before the crisis that erupt in 2008, every time the economy slowed or crisis erupted, the Fed will take steps to encourage credit expansion and every time the economy reaccelerated.  In actual fact, all the steps that the Fed has taken simply caused the credit bubble to expand.  Eventually, this credit bubble will have to give way and the consequences will have to be bear by future generation.  The past qualitative measures put forth by the Fed have not brought much improvement in the economy.  And the austerity measures that has or in the process of being implemented in various parts of the world may be the catalyst that causes the credit bubble to burst.  When credit stops expanding, we will see a greater slow down and may eventually see the natural financial depression that should have happened back in 2008 if the Fed did not intervene with its easing measures.

For those that want to learn more about how the current measures are impacting the economy and the likely outcome of such measures, you can read up on the "The New Depression", a book written by Richard Duncan.  It gives a clear explanation of how Fiat money has impacted the economy and changed the way the world economy works.  

STI In Sideway Trend

Singapore stock market started the year on a positive note.  The Straits Times Index started at 2646 on the first day of trading and is now at 2791, sitting slightly above its 50 day and 100 day moving averages.   

The current technical charts do not paint a picture of sustained rally at this point.  The 14 day ADX is well below the 20 level mark, indicating that there is no strong trend at this stage both to the upside or downside.  The index is likely to move sideways and the resistance and support is at 2800 and 2640 respectively.

The 2 day RSI is moving towards overbought territory suggesting that we will see some pullback next week.  Another point to note that there the recent rally is made on slightly lower volume.  This shows that market conviction is not there and it supports the pullback scenario next week.