Dark cloud cover? - STI

Let us take a look at the weekly chart of the STI. I was quite surprised by the strength of the uptrend of the STI this week. The STI started the week at 1608 and ended at 1745; a gain of 8.5%. Also this uptrend was on the back of high volume (compared with the volume of previous weeks). So the uptrend, from a middle term perspective, looks good and the STI appears headed towards 1926.


Let's have a look a the short term picture via the STI's daily chart. The outlook for the short term is not so certain. Today, the candlestick chart formed what look like a 'dark cloud cover' pattern. Such a formation occurs when the price opened higher after a long white (green here) candle but closes below the mid-point of the white candle. In this case, the mid point of the white candle is 1732. Today's index hit a low of 1729 but closed at 1745. So this is not quite a dark cloud cover if we follow its definition strictly. But i would still be a bit cautious next week. Previous support for the STI before it broke towards 1500 was around 1673. Its behavior around that level is quite important. If it is able to stay above this level, then that would give further weight to the uptrend, or at least, to consolidate for a while before pushing upwards. If not, then we may be headed towards 1570 again.

Some are saying that the STI is overbought and hence should reverse. So for this daily chart, I included a chart of its stochastics. On it are two parallel grey lines at the 20% and 80% mark (the scale on the right is in %). By definition, if the red line goes below the 20% line, it is (whatever the stochastic is measuring) oversold and if the red line goes above the 80% line, it is overbought. Overbought, as defined in Investopedia, is a situation in which the demand for a certain asset unjustifiably pushes the price of an underlying asset to levels that do not support the fundamentals. In technical analysis, this term describes a situation in which the price of a security has risen to such a degree - usually on high volume - that an oscillator has reached its upper bound. This is generally interpreted as a sign that the price of the asset is becoming overvalued and may experience a pullback. The STI certainly is in overbought territory. One trading technique is to go short when the stochastics dips below the 80% line. Another is to buy/sell when the stochastics cross each other. But it would be a mistake to go short simply when stochastics enter the overbought region. In a strong market (either rising or falling), stochastics can stay oversold or overbought for extended durations. Rule of thumb: Do not anticipate. Let the market lead.

Sorry, long story. Bottom line: The picture is mixed; for the middle term, the uptrend for the STI looks strong, while for the short term, it looks a bit uncertain. However, I do not think it would be wise to go short; a better strategy would be to go long on pullbacks.