Ernest’s market opinion (27 Oct 17)

Dear all

STI has closed at 3,386, a fresh 29-month high. Some of you who have been less than 30% invested in their portfolios and have not added more exposure in their equities portfolio last month are wondering whether you have missed out of the rally. Should you continue to chase this?

Read on for more.

 

S&P500 last closed 2,581

S&P500 is on a strong uptrend with all the exponential moving average (“EMA”) trending higher. ADX closed at 29.3, amid positively placed DIs, indicative of a trend. RSI closed at 70.7. This is not extremely overbought, relative to past levels. Over the past three years, RSI can reach between 78 – 80 before profit taking set in. Based on Chart 1 below, there does not seem to be obvious signs of potential chart reversal patterns. However, both RSI and MACD have to be observed in the next 1-2 weeks to see whether there are continual signs of bearish divergences.

A sustained break below its 20D EMA (currently at 2,552) may be a sign for further review of the chart.

Near term supports: 2,567 / 2,560 / 2,552

Near term resistances: 2,595 / 2,600 / 2,625

Chart 1: S&P500 strong uptrend; not extremely overbought yet

S&P500 chart as of 27 Oct 17

Source: Chartnexus chart as of 27 Oct 2017

 

Hang Seng last closed 28,439

Hang Seng seems to be consolidating its recent hefty gains since last month. Although all the EMAs are still rising, ADX has declined to 16.3, indicative of a sideways trading market. It is noteworthy that indicators such as RSI, MFI and MACD have shown clear signs of bearish divergences. It is likely to trade sideways in the near term. A sustained break below 27,925 is negative for the chart. Conversely, a sustained break above 28,793 is bullish.

Near term supports: 28,274 / 28,100 / 27,925

Near term resistances: 28,534 / 28,793 / 29,000

Chart 2: Hang Seng likely sideway trading in the near term

HSI chart as of 27 Oct 17

Source: Chartnexus chart as of 27 Oct 2017

 

STI last closed 3,386

STI has broken 3,355 with a gap up. All EMAs are trending higher with 20D EMA forming a golden cross with 50D EMA on 10 Oct 2017. ADX closed at 37.3, amid positively placed DIs. The uptrend seems strong. Except for OBV, most indicators have not exhibited bearish divergences. However, it is noteworthy that RSI closed 74.6, highest since 11 May 2017. For the past three years, there is likely to be less than ten trading days where RSI is above 74.6. The highest RSI for the past three years is 79.5.

A sustained breach above 3,355 points to an eventual measured technical target of around 3,500 – 3,510. This represents potential and may not be reached immediately, given the elevated RSI. Profit taking is likely to set in the near-term, but the uptrend is unlikely to be disrupted. A break below 3,350 on a sustained basis negates the (very) bullish outlook. However, it needs to breach below the 200D EMA (currently at 3,191) to be bearish.

Near term supports: 3,361 / 3,355 / 3,315

Near term resistances: 3,400 / 3,406 / 3,430

Chart 3: STI clocked a fresh two-year high

STI chart as of 27 Oct 17

Source: Chartnexus chart as of 27 Oct 2017

 

Conclusion

Based on the above charts, STI’s uptrend continues to be strong and a breach above 3,355 points to an eventual measured technical target of around 3,500 – 3,510. This represents potential and may not be reached immediately, given the elevated RSI. Profit taking is likely to set in the near-term, but the uptrend is unlikely to be disrupted.

As the broad market has generally appreciated over the past few months, I have done two compilations, using Bloomberg’s closing data as of 27 Oct 2017. I have appended the top 5 stocks sorted by RSI in descending order and the top 5 stocks sorted by total potential return in ascending order.

a) Table 1 shows the top 5 stocks sorted by highest RSI. I.e. these stocks, namely Hiap Hoe, Lian Beng, Micro Mechanics, China Sunsine and Lee Metal are overbought based on RSI alone.

Table 1: Top 5 stocks sorted by highest RSI

Table 1_Top five stocks with the highest RSI 27 Oct 17

Source: Bloomberg as of 27 Oct 2017

b) Table 2 shows the top 5 stocks sorted by lowest total potential return. I.e. these stocks, namely First Sponsor, Mandarin Oriental, Pacific Radiance, Cosco Shipping and Olam International have the lowest total potential return (i.e. total potential return is derived from estimated dividend yield + estimated capital gain).

Table 2: Top 5 stocks sorted by lowest total potential return

Table 2_Top five stocks with the lowest total potential return 27 Oct 17

Source: Bloomberg as of 27 Oct 2017

It is noteworthy that the above data is sourced from Bloomberg as of 27 Oct 17. I have not verified the above data. Also, the above data may change without prior notice. My clients and readers on my website signup list will receive the full compilation of the above lists via email.

 

Ernest’s personal action plan

As I am >100% invested, given the run-up in the equity markets, I am likely to do the following actions for my own portfolio:

a) I will take the opportunity to sell my existing stocks into strength, especially as the stocks head into their 3Q results period;

b) I may buy some laggard stocks which may not have appreciated much as compared to their upcoming potential catalysts. Such potential catalysts may (but not limited to) their upcoming results;

c) I may short some stocks via CFD, if the setup suits my criteria of stocks shorting.

 

Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider leaving their contacts here http://ernest15percent.com/index.php/about-me/

 

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.

 

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