This report was compiled by OCBC Research this morning:
Upside capped around 3,300 - 3,400
The STI has performed as per our forecast on 26 March.
The break through the 1st resistance zone around 3,000 - 3,100 was a result of a gap up in yesterday's trading session. As it was made on the back of high volume, it suggests that there could be further upside in store as the trading week progresses.
Elliot wave counts suggest this could be the 2nd wave (Wave B) of a 3-wave correction which began in Oct 07. This would mean that the index could garner sufficient momentum to head towards our 2nd resistance level around 3,300.
3,300 is a significant level because it was the level around which the index had consolidated in the past and is also in proximity to the longterm uptrend line which was broken in Jan 08 and also the 200-day moving average which currently trades around 3,400 (refer to chart 1).
Based on our standard deviation (SD) measure of the STI, we also observe that the 1,5x SD level sits around 3,350. Hence the level around 3,300 -3,400 should provide a formidable resistance ahead as the index progresses higher (refer to chart 2).
We have observed that the stochastic indicator has begun showing signs of a reversal at this stage as it trades within overbought region, hence we expect mild weakness to arise before the STI attempts 3,300 (refer to chart 1).
Our expectation of limited upside for the index at this stage is based on historical performance of the STI on the monthly price chart against the 20-month exponential moving average. We have observed that each time the index cuts down on this moving average, the following month's performance tends to be weak.
We have seen muted returns in Feb and Mar, hence Apr could prove to be a month which the index will attempt to rebound before slipping back down again (refer to chart 3).
We maintain immediate support at the low in Mar of around 2,745 and subsequent support at around 2,500 - 2,600.
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