New 52-week low signals deeper selling ahead
One of the topics I discussed in my Dec stock market outlook seminar with members of my community was the technical picture of the Straits Times Index. This was what I said at the time:
- August low 2740 was more than 20% correction from last April high which meant that the STI entered bear territory.
- Price action of STI can be visualised as zig-zag or down-up-down wave movement.
- From market top at 3550 last April to 2740 in August was a down-wave.
- Down-leg will be followed by up-wave.
- From 2740 till the event in December, price was still above 2740 which means market was in the up-wave.
One of the points I emphasised at that time was this ‘I don’t know when the next down will start but I know once price goes below 2740, we can confirm that the up-leg is over‘.
This chart below shows you what I am looking at.
Down move in STI breaking Aug low confirms retracement-consolidation over
Straits Times Index in ‘C’, brace for 40-60% correction
When we look at previous bear markets, we will find that price moves exactly this way, for instance during 1996-1999 Asian Financial Crisis.
STI chart 1996 – 1999
And then from 2007 – 2009 during the Subprime Crisis.
STI chart 2007 – 2009
This means that by breaking 2740, Straits Times Index is now in C territory. If history is a correct guide, be ready for a top to bottom correction of 40-60%
Hang Seng Index same setup
HSI is now in the ‘C’ phase and should visit lower lows.
Hang Seng Index breaks ‘A’ low, confirms in ‘C’ wave; orange is former 52-week low
If you were to look at individual stocks, many sold down on high volume. As a reminder,
Market corrections/crashes take on a life of their own especially when price is down this magnitude on high volume. As price falls, margin calls kick in which forces more selling by over-leveraged buyers. In the absence of buying interest, spreads may also widen for illiquid stocks.
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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."