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STI-MACD bearish divergence sets up potential reversal

Straits Times Index (STI) is setting up for potential bearish reversal

The Straits Times Index has been fighting a confluence of multiple-year resistance and Fib-R 61.8% since May. It retreated last two weeks after failing to penetrate the zone (Point A).

At least one trading indicator shows that the STI is losing its momentum. MACD prints a bearish divergence. From the daily chart, the bearish divergence shows up when price makes a higher high where MACD makes a lower high. This is a potential reversal setup that stock market participants look for. Bears will be looking out for signal to go short while bulls feel anxious about their existing positions.

Straits Times Index weekly chart

STI fails to penetrate confluence of resistance (green zone)

 

What does MACD bearish divergence say about STI?

  1. MACD divergence says that price momentum upwards is declining. 
  2. This bearish divergence is not favourable to STI bulls.
  3. Like dark angry clouds in the sky pronouncing that rain may be coming, a bearish divergence says that price may correct soon.
  4. It is however not a sell signal because it says price may fall but is not falling yet; even a sky covered by dark angry clouds can unexpectedly turn sunny.
  5. Multiple divergences can appear before price corrects.
STI-MACD bearish divergence

Divergence (orange) in the face of resistance sets up for potential reversal

 

What other signs to look out for?

Both bears looking for short and bulls anxious about their position must look for other signs. Good trading signals usually have multiple elements.

In conjunction with MACD, STI must show the following to confirm a reversal:

  1. Form bearish reversal chart patterns like double, triple top, head and shoulders.
  2. Clearly break an upward trend line that provides support.
  3. MACD should cross its zero line, a signal that indicates change of trend.
  4. A candlestick pattern that serves as a clear trigger must appear.
  5. The more times price fails at the resistance zone, the stronger the resistance, the higher probability of reversal.

If the overhead zone turns into support after price penetrates successfully, the whole reversal setup fails.

Singapore stock market heat map

Although heatmaps offer snapshots of performance that are only good at the time they are taken, this one offers comfort to bulls for now. (Source: SGX)

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Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.

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