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STI likely to revert to long-term uptrend

WITH the recently announced set of cooling measures in the property market, the selling pressure in the Straits Times Index (STI) worsened.

The Singapore government announced that it is raising the additional buyer's stamp duty (ABSD) and tightening loan-to-valuation (LTV) limits for residential property purchases to cool the local property market and keep prices in-line with economic fundamentals.

The general sentiment of the market was affected negatively as property developers and banks were hit badly due to this new set of cooling measures. As a result, the STI fell as much as 2.4 per cent on July 6, 2018. Nonetheless, the current price action suggests a possible rebound back into the long-term uptrend due to the over-reaction by the market.

Since hitting a high of 3,641 points on May 2, 2018, the STI has erased 12 per cent to the year's low of 3,176 points on July 6, 2018. That sharp selloff initially broke price below the crucial 3,200 psychological support area. However, that bearishness appeared short-lived as the bulls immediately defended the 3,200 psychological support and regained ground by closing at 3,233 points on July 9, 2018. July 6, 2018 was the only day where the STI closed below the 3,200 psychological support area, suggesting a possible false bearish breakout.

The 3,200 psychological support area is particularly important as it has been keeping the uptrend intact since May 2017. There were seven attempts by the sellers to turn the trend bearish but each time failed miserably as the 3,200 psychological area halted the selloff.

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The strongest rebound off the 3,200 psychological support area came in September 2017 with the STI moving back into the long-term uptrend and rallying 8.2 per cent over the next three months.

Thus, it is no surprise that the bulls are once again defending the 3,200 psychological support area after the recent sharp selloff. Keep in mind the 3,200 psychological round number also coincides with the 200-week moving average, making it a more reliable support area.

In addition, the Relative Strength Index (RSI) has also been oversold since June 14, 2018. RSI measures momentum. A reading above 70 represents overbought condition while a reading below 30 represents oversold condition. The RSI recently hit an extreme low of 23.

Therefore, it will just be a matter of time before a rebound happens. More lights are shed with the recent bullish price action. After testing the 3,200 psychological support area, the subsequent bullish rejection has lifted the RSI back above the 30 oversold region suggests the start of a mean reversion higher for the STI.

Our historical study on oversold RSI mean reversion suggests a rebound higher is always likely to happen after the RSI dips below the 30 oversold region. An average rebound of 5 per cent tends to happen after the mean reversion signal is confirmed when the RSI rises back above the 30 oversold region.

Zooming in deeper also shows a bullish breakout above the immediate downtrend line, suggesting a further sign of strength.

All in, it seems likely that the 3,200 psychological support area will hold up once again to keep the long-term uptrend intact.

Coupled with the recent bullish rebound and break above the downtrend line and oversold RSI mean reversion, the STI looks likely to revert back into the long-term uptrend to target the 3,341 resistance area followed by 3,462.

  • The writer is chief technical strategist, Phillip Securities Research.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice

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