I had 2 pretty good months with my own stock market trading this month and last. Those of you who followed my stories know that I have been following the Straits Times Index, that I have found some pretty useful observations. I think these are little nuggets that the market leaves lying around in charts for those of us who are lucky enough to pick it up. If we are persistent enough we can find some more. So I am like this little boy who found a dollar on the floor and I am like going back to that same spot everyday to see if I can find some more.
Before you go further, I would like to emphasize this important notice to readers: I am not a qualified financial advisor. I don’t have a CMS license. My performance is not your performance. This is on the Internet, I don’t know who you are. This writing may not be suitable for you.
This material is for reading and learning, not for investment/trading action. You alone are responsible for your own action.
As a trainer, I promote learning so I write this stuff down to share. Like a little boy, I am excited – not just for making money on the right decisions – but also because we are looking at a market action that is part of a big stock market cycle tumbling at HFT speed into a big unknown. There are not many like these around thankfully (only about 3 big ones since the last 20 years) so I am really going through blow by blow and enjoying every day of it.
So why is market bottoming?
A temporary one for now? There are three reasons.
Reason #1 – Past STI performance
In this story on 25 August, ‘Can past give Singapore stock investors lesson or two on STI?‘ I shared with everybody that the Straits Times Index appears to follow a plan. I was not very sure. After all, 2 times don’t make a sufficient sample size. Based on the past instances however there are recurring patterns that can be spotted easily. The most obvious one here – that the STI might find support around 20% for the top during a big correction.
Reason #2 – Price action providing credible evidence
So last week the market gave us evidence that this 20% retracement was indeed being followed. On 10 September I wrote this story ‘Did stock market signal bottom for STI and HSI?‘ to record my observation. At this point, the 20% retracement mark was becoming prominent because a potential double bottom was printed exactly where 20% is supposed to be.
STI potential double bottom on daily time frame
This is the chart today. Trading has not closed yet for the Singapore stock market but at 3.36pm this is what my chart shows with the latest update.
STI shows 3X price reaction to 20% retracement
Reason #3 – Time element!
This is one more piece of observation that I want to present this time. Again 2 sample size is simply not credible enough and a trader never takes excessive risk on unknowns but here it is. There is obviously a time element as play here since each move appears to have the same duration.
STI monthly chart showing 5-3 sequence
If this is a coincidence, it is a pretty good one.
STI monthly chart of current price action showing 5 month correction
How do I read this? If all corrections last 5 months only, then the bottom of the market was last month in August.
But wait there’s more
Because those of you who use Elliot Waves must surely recall that there is a significance to ’5′ and ’3′. Mere coincidence or something else? I really don’t know LOL. From Elliott Wave International, ‘Basic Tenets of the Elliott Wave Principle‘
A five-wave impulse (whose subwaves are denoted by numbers) is followed by a three-wave correction (whose subwaves are denoted by letters) to form a complete cycle of eight waves. The concept of five waves up followed by three waves down is shown in Figure 2.
Source: Elliott Wave International
That is ’5′ and ’3′ repeating over and over. Very significant or very coincidental? Elliott Waves have been studied for a long time. I don’t know whether there is a time element in Elliott Waves this is something now to look up.
Amazing. What’s next?
This cannot be the holy grail of trading no matter how nice it looks. Definitely there are many other things to consider. Be mindful of FOMC meeting outcome tomorrow night because a rate decision will have a huge impact. How big? The last thing a rate hike was so hotly anticipated was in March. It triggered a huge wave of volatility. Whatever is observed here may turn out wrong in 36 hours time.
In addition, I would be looking at how the Straits Times Index closes this week as well as the end of the month. After all, even the best plan can deviate.
If you like all this story, do follow me on Twitter @sohtionghum and/or @terraseeds. I write about these stuff almost everyday and certainly I follow the STI and its constituent stocks on a weekly and quarterly basis. Please share with your friends those who are investing and trading so that we can all learn something together. Finally you can also join me on Google Plus where you can see some stuff posted by the team that does not make it to the blog here.
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
Soh's Twitter account @sohtionghum
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"I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."