Stock Markets Face Serious Threat Unless Key Levels Hold

17 June 2011
Stock Markets Face Serious Threat Unless Key Levels Hold
By Gabriel Gan


The fortnight that just ended has strengthened my arguments in December 2010 that inflation and the European theatre will grab investors by the scruff of the neck, dictating the direction on the stock market to a large extent.

The inflation threat and the European sovereign debt crisis have never been more pronounced than it was in the past few months, but we now have a new issue to grapple with – the threat of a slowing global economy and a world without stimulus measures.

Of particular importance is the overwhelming bad news that have swarmed the stock market for the past two weeks, causing sharp corrections to negate whatever minor rebounds there were – a typical sign of a bearish market – resembling a lower-low pattern just like going down the staircases.

The Worries Continue
The inflation threat in Asia, especially China, has pushed up borrowings rates and that will invariably hit consumers. As Asian governments try to cool the growth, they have also burdened businesses and individuals with higher borrowing costs and lesser spending power.

China’s inflation rate jumped to 5.5% – in-line with expectations – yet investors are now worried that the Chinese government, after raising rates four times since last October, may jack up interest rate after raising the banks’ reserve requirement ratio.

With lending by the banks down significantly, there are worries that China’s manufacturing sector and property sector may cool down. Although it is the hope of the Chinese government for prices to come down, investors are concerned that slowing demand from China will ultimately result in weaker demand for the entire global economy – especially for commodity-related products.

As China fight deflation, the US is trying very hard to revive its economy as the world faces the end of QE II at the end of this month. The stock market correction started gaining traction when Fed Chairman Ben Bernanke spoke of a “frustratingly weak economy” while not giving any mention about more stimulus measures.

To make matters worse, US economic data showed concrete signs of a slowdown while the job market weakened yet again after showing earlier signs of a revival.

President Obama is desperately trying to get the Congress to raise the US debt ceiling by 2 August or the US government may not be able to meet its obligations.

Although these bad news are nothing new, it has finally sunken in with investors who are now convinced that the rosy picture has turned less beautiful. What was bad has now turned worse, especially for Europe who are constantly bickering about the rescue of Greece – a country now facing bankruptcy with many angry people protesting violently on the streets.

Is the Greece issue something new? Is China’s inflation problem something new too? The answers to both are a no, but it is the US that have started to get investors worrying about the global economy.

What Lies Ahead?
We need the European Union to get its act together and stop squabbling. We have seen how the Europeans and the Americans argue when the world needed them to come out with concrete plans to handle the financial crisis in 2008.

While the Europeans may very quickly come up with a solution to Greece’s problems, we should not be optimistic about a QE III or a solution to the US debt ceiling problem anytime soon. From now till early August, we are probably going to hear of a solution followed by no solution over and over again till an agreement has been reached by the Democrats and the Republicans.

All these create uncertainty and even more volatility in the stock market.

As for China, we can only hope that inflation has peaked and, thus, will reduce the likelihood of more interest rate hikes. We will continue to face a lot of pressure from China’s economic data hence it is best to watch the US and China before we decide if we should be investing for the medium- and long-term although stock prices look cheap.

Key Technical Levels Under Siege
The technical indicators for the daily chart of the Straits Times Index (STI) look deeply oversold, but it can stay oversold for very long when sentiment is weak and if the stock market is in a bearish mode. Daily indicators are often more volatile and suitable for trading purposes. Nonetheless, it does not tell us the medium- and long-term direction of the stock market unlike weekly and monthly charts.

The daily charts tell us that 3,040-3,060 should have been the support level for the STI but it has, rather easily, been broken at the time of writing this article. The next support for the STI is at the psychological 3,000-level although this is at best, a weak support that cannot be compared to the support region between 2,920-2,970 where two previous lows for a strong support.

It is best for the STI to continue its slide all the way down to about 2,950 without any rebounds because minor and meaningless rebounds give strength to even more corrections, which is something we do not need and want at this point in time.

On a longer term, the STI must dip below 3,000 points and begin a sharp and powerful rebound above 3,000 points or we may see the STI falling back into bear market territory after getting out of it in July 2009. We can tolerate the STI falling below 3,000 points in the short-term but it must not fall below this level and stay below it for more than two months.

Similarly, the Hang Seng Index has fallen below 22,000 points – a very important support that decides if the HSI stays in bull market territory or otherwise. At the time of writing, the HSI is already in a long-term bear market territory and we need the index to stay above 22,000 points or may a bear market altogether with the STI.

The Shanghai Composite Index has been languishing at or around the borderline for almost a year. It has, in fact, fallen into bear market territory since March 2010 and has struggled to get above 2,900 points. It has now dipped 2,700 points but may find some support at 2,661 points with the next meaningful support at 2,319 points.

We need a very strong rally for all these markets to either get out of the bear zone or at least get closer to the bull zone. Investors should watch these key levels closely for an indication of the longer-term trend while short-term trend suggests more downside with some rebounds along the way.

The stock market is getting more and more precarious hence investors should thread very carefully and stay tuned to economic news.

The two likely “white knights” are a QE III or a drop in China’s inflation levels. If these good news do come true, it will definitely give the stock market a much-needed boost, in the short-term.

Source/转贴/Extract/: www.sharesinv.com
Publish date:17/06/11