Dear readers,
Notwithstanding my cautious stance in the general market, I have raised my allocation from 35% on 14 Oct 2016 to around 89% on 28 Oct 16 on stocks with potential near term catalysts.
Read on my technical outlook on the markets.
S&P500 Index
Just to recap what I have mentioned on 14 Oct 2016 (see HERE), I wrote “it is alarming to see that 21D and 50D exponential moving averages (“EMAs) are trending lower with 21D EMA forming a death cross with 50D EMA. 100D EMA started to turn flat and S&P500 closed below 100D EMA yesterday. It is noteworthy that S&P500 has not closed below its 100D EMA for three consecutive trading days since 1 Mar 2016. Thus, the price action around its 100D EMA is worth watching. Another bearish factor is that amid negatively placed directional indicator (“DI”) reading, ADX has risen from 20 on 7 Oct 2016 to 27 on 14 Oct 2016, indicative of a trend. A sustained break below 2,120 with volume points to an eventual measured technical target of 2,065. S&P500 has to make a sustained close above 2,157 with volume to negate the bearish tinge in the chart.”
–> S&P500 closed 7 points lower from 2,133 on 14 Oct 2016 to 2,126 on 28 Oct 2016. Since 14 Oct 2016, S&P500 touched an intraday high of 2,155 on 24 Oct 2016 and an intraday low of 2,119 on 28 Oct 2016. Both levels were my previously cited resistance and support respectively.
Based on Chart 1 below, S&P500 closed below 100D EMA (currently 2,136) yesterday. As mentioned previously, S&P500 has not closed below its 100D EMA for three consecutive trading days since 1 Mar 2016. Thus, the price action around its 100D EMA is worth watching. After forming a death cross, 21D EMA is moving apart from 50D EMA which is another negative trait. A more alarming factor is that, amid negative placed DIs, ADX has risen from 27 on 14 Oct 2016 to 29 on 28 Oct 2016, indicative of a trend. A sustained break below 2,120, followed by a break below its 200D EMA (currently around 2,105) is very bearish and points to an eventual measured technical target of 2,065. S&P500 has to make a sustained close above 2,157 with volume to negate the bearish tinge in the chart.”
Near term supports: 2,117 – 2,120 / 2,105 / 2,093
Near term resistances: 2,136 / 2,144 / 2,154 – 2,157
Chart 1: A sustained break below 2,120 is bearish, especially if it breaks below 2,105
Source: Chartnexus chart as of 28 Oct 2016
Hang Seng Index
On 14 Oct 2016, I mentioned that “Hang Seng is trading dangerously close to its lower end of the trading range 23,193 – 24,125. 21D EMA has started to decline. 50D EMA is starting to turn flat. Although ADX has slid from 29 on 7 Oct 2016 to around 24 on 14 Oct 2016, the DIs have turned negative. A break below 23,193 / above 24,125 points to an eventual measured technical target 22,261 / 25,057 respectively.”
–> Since 14 Oct 2016, Hang Seng dropped 278 points to close 22,955 on 28 Oct 2016.
Based on Chart 2 below, Hang Seng closed below its trading range 23,193 – 24,125 for a second consecutive day. It also closed below its 50D EMA for the second consecutive day. 21D EMA continues to decline with 50D EMA turning flat. Amid negatively placed DIs, ADX has started to rise from 16 on 26 Oct 2016 to 19 on 28 Oct 2016. Although ADX is still below 20, the increase is significant. A sustained break below 23,193 / above 24,125 points to an eventual measured technical target 22,261 / 25,057 respectively.
Near term supports: 22,700 / 22,567 / 22,261 – 22,295
Near term resistances: 23,158 – 23,193 / 23,357 / 23,480 – 23,500
Chart 2: Hang Seng – A sustained break below 23,193 is bearish
Source: Chartnexus chart as of 28 Oct 2016
STI Index
On 14 Oct 2016, I wrote that “amid negatively placed DIs, ADX has halted its decline and started to rise from 10 on 7 Oct 2016 to 14 on 14 Oct 2016. This still indicates that there is a lack of trend but the increase is noteworthy, coupled with negatively placed DIs. All the EMAs are declining with 21D EMA pulling apart from 200D EMA after converging. Indicators are mixed but some indicators such as OBV and RSI are showing some bearish divergences. My personal view is that STI may not be able to have a sustained close above its strong near term resistance of around 2,845 – 2,865. A sustained break below 2,791 / above 2,911 points to an eventual measured technical target of 2,671 / 3,031 respectively.”
–> Since 14 Oct 2016, STI touched an intraday high of 2,861 on 25 Oct 2016 but closed below the aforementioned strong resistance of around 2,845 – 2,865 to 2,816 on 28 Oct 2016.
Based on Chart 3 below, although the DIs are negatively placed, ADX has barely risen from 14 on 14 Oct 2016 to 15 on 28 Oct 2016. This still indicates that there is a lack of trend which may explain why STI movement has not been huge since Sep 2016. 21D EMA has formed death crosses with 200D EMA, 100D and 50D EMA. However, with the weak ADX, it is likely that STI may continue to trade within a range of 2,781 – 2,911. My personal view is that STI may not be able to have a sustained close above its strong near term resistance of around 2,840 – 2,860. Nevertheless, with the weak ADX, STI may not have a large sustained fall in the next 1-2 weeks. A sustained break below 2,781 / above 2,911 points to an eventual measured technical target of 2,650 / 3,040 respectively.
Near term supports: 2,810 / 2,800 / 2,791
Near term resistances: 2,831 / 2,840 / 2,860
Chart 3: Strong near term resistance 2,840 – 2,860
Source: Chartnexus chart as of 28 Oct 2016
Conclusion
With reference to my write-up on 14 Oct 2016 (see HERE), I wrote that “In the next two weeks, although I am increasing cautious on the general market, I remain ready to accumulate some small mid cap stocks with potential near term catalysts.”
–> As some of the small mid cap stocks with potential near term catalysts have declined largely in tandem with the general market, I have raised my allocation from 35% on 14 Oct 2016 to around 89%. I only have two stocks in my portfolio. I am ready to raise my % allocation to 150-200% on market pullbacks on selective stocks. (I will inform my clients on my portfolio on any significant changes in my portfolio, stock selection etc.)
Many of you have asked me what are my views on the U.S. Election and how it impacts the equity markets. Personally, I try not to time such important event because
a) I need to predict accurately on the outcome which I doubt I have any unique sustainable competitive advantages vs political analysts;
b) More importantly, I need to predict the stock market’s short term (1-5 days) and medium term reaction (5 days – a few months) to such an outcome. Brexit is a case in point. Few predicted it would happen, and even fewer predicted UK stocks can surge to near all-time high after Brexit.
Therefore, although I am cognizant that the U.S. Election may be a market moving event, I do not waste precious time in predicting the outcome and the subsequent market reaction. (I prefer to use my time to research and spot stocks with potential near term catalysts.) What I can do is to proactively choose to position my portfolio ahead of the U.S. election in the following way:
a) Although I am 89% invested, I can easily raise my equity allocation to 150-200% with the help of CFD. I.e. I can still buy on weakness. It is noteworthy that our Singapore market seems to be more resilient in terms of chart (e.g. low ADX etc) vs U.S. and Hong Kong.
b) As I am cautious on the general market and the U.S. election in November, I am extremely selective in my stocks and I will only accumulate those with potential near term catalysts on weakness.
To reiterate, besides my technical views on the indices above, you can refer to some of the write-ups here on why I am bearish on the general markets.
a) Ernest’s market outlook 7 Oct 2016 (see HERE);
b) HSBC: There’s Now a Very High Chance of a ‘Severe Fall’ In U.S. Stocks [Bloomberg 12 Oct 16] (click HERE);
c) The stock market is turning into a sloppy, ugly mess—and it could get worse [Marketwatch 14 Oct 16] (click HERE)
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P.S: Do note that as I am a full time remisier, I can change my equity allocation fast to capitalize on the markets’ movements.
Disclaimer
Please refer to the disclaimer HERE