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STI: How low can it go?

Saturday, January 23, 2010

With the Dow down 216.9 (-2.09%) at 10,172.98 and the S&P down 24.72 (-2.21%) at 1,091,76, it is likely that the bloodbath will continue next week in the Asian markets. Crude oil is down to US$74.23, that is down US$1.85 or 2.43%. Crude palm oil (CPO) on 22 Jan closed at RM2,455, down RM33 or 1.33%.

The flood of negative price action is psychologically daunting for investors and longer term traders alike. Investors are likely to wait for prices to go even lower before committing more capital while longer term traders are likely to wait for clearer signs as to whether the trend is still up or reversing before taking fresh positions. The one group that might benefit are the short term traders who might short the market as the chances of further downside is definitely greater.

Having said this, generally, the longer term uptrend is intact and investors would do well to hold on to their positions and ride out this rough patch. Of course, not all stocks are created equal, certain counters such as Healthway Medical are expected to be more resilient while certain counters such as Yanlord might sink much more.

In the last session, the STI gapped down and traded lower for most of the day but did a dramatic u-turn and closed higher, forming a white candle which looks promising. Promising because a possible reversal pattern which chartists call a "morning star" might appear if the index opens and closes higher in the next session. Confirmation is still required.

However, with the return of heightened volatility as could be seen in the widening of the Bollinger bands, a lack of buying momentum as could be seen in the rapidly declining MFI and the continuing distribution as could be seen in the declining OBV, it would be no wonder if buyers hold back in the next session, which could send the STI lower.

Now, the question is how much lower will the STI go if it does continue sinking? To answer this question, I have decided to draw three sets of Fibo lines for the STI's chart. For the visually challenged, please don't click on the chart. My eyes watered after a few minutes of looking at it.

From the three sets of Fibo lines, we can see where some of the Fibo lines are so close to each other that they overlap or almost do so. From these lines, I see strong supports at 2730-2740 and 2680-2700. Another 5% downside, it seems, cannot be ruled out from the last session's close of 2,819. Time to bring out the warchests? Maybe. May Lady Luck smile on us.

5 comments:

bummy said...

that just above 50% fibo line between 3918 oct 07 high and 1455 mar 09 low. 2700 is where we were in early sept 09 just before lehman crash. so while 2700 - 2720 is a very strong support, if that fails, we may end up with a W shaped recovery. Although I think the chance of this occuring at this stage is fairly low, to err on side of caution, i keeping my reserve locked up

AK71 said...

Ever so cautious. You mean Sep 08, I think. ;) I will be going away for another short vacation from tomorrow. I should have access to the internet this time round and might post at night if I am not out enjoying the night life too much. ;-p Good luck, mon ami.

bummy said...

opps, yeah i meant Sept 08. Enjoy your vacation.

Anonymous said...

Hi AK71,

I am thinking of accumulating Healthway and Fraserscomm this correction. I saw them in your portfolio as well. At current price of Heathway 17 cents and Frasercomm 15.5 cents, do you think i can go in ?

Thank you

Regards
Phyllis

AK71 said...

Hi Phyllis,

I am not so keen on Fraser Comm Trust. The dpu is about 1c per annum, if I am not mistaken. There are better yielding REITs out there. If you look at Fraser Comm Trust's gearing, it is rather high too.

As for Healthway, its resilience is quite impressive. However, today's price action shows that there are many sellers out there and 17.5c is still a resistance to watch. I am not comfortable with accumulating Healthway at 17c. 17.5c is actually the old eventual target of 19.5c after adjusting for rights. I consider Healthway fairly valued at that level at this point in time. If you think that Healthway should trade closer to Raffles Medical Group's valuation, its price should be about 18.5c.

Of course, the above views are based on fundamentals. They cannot account for sentiments. Disclaimer applies.


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