AM Fraser Research

Lack of knee-jerk rebound this time could lead to sideways market and dwindling turnovers.

Massive plunges in January/February had led to strong technical rebounds with gains of over 400 points from 2747 to 3161 within a week in late Jan and nearly 270 points in mid-Feb from 2859 to 3126, also in a span of just over a week.

This time having lost about 230 points with a 100-point plunge on Monday, there is no sign that a knee jerk rally is coming soon. Not only that but the tendency for the STI to stay below 3000 for only 3-4 days in the last 2 instances may not be repeated again. In fact we are in a new strange situation that is getting harder to gauge.
On hindsight, there seems to be a blessing in disguise in a plunging market for nimble players as strong technical rebounds ensued. But with the STI now sticking to 2900 implies that the frequent experiences of bear traps from 3050 to 3150 have left bruised traders unwilling to take another risk.
While a lengthier consolidation may be badly needed after the big 100-day downtrend starting from Oct 11’s peak of 3831 to 2747on Jan 22, down 1084 points or 28.3%, the outcome may not be a strong rally.
It could even be another downleg to test 2850 and 2750. And no one can be sure that these precarious support areas can hold as the major support actually lies closer to 2600 or even 2500 if the STI goes for a complete 50% retracement of its 5-year bull run from 1170 in early 2003 to 3831.
History shows that once previous super bull markets in 1987, 1993 and 1999 ended, the index would definitely fall back to the earlier peaks and at times plunged even deeper like in 1997-98 when the Asian crisis bottomed out at 800 on the old index from high of 2163 in 1996.
Similarly the 2000 dot.com crash left the old STI more than halved from 2583 in Jan 2000 to 1205 by March 2003, even below the 1987 peak of 1288, prior to the infamous Oct 19 Black Monday on Wall Street. (NB there is a 1 to 3 percentage point difference between old and new STI).
While we do not expect the current bear phase to wipe out all the gains from the 2003-07 longest bull market in history, it cannot be denied that the STI has lost nearly 1100 points from its peak and another 150-250 point loss from 2750 to a strong bottom at 2500-2600 is not like the end of the world.
In fact traders and investors would prefer a selling climax with the STI testing these support levels quickly as for sure an equally strong rebound will take place instead of a sideways boring market with narrowing trading ranges.

But again history is not on the side of a quick bottom except for the Oct 1987 crash when the old STI bottomed out at end of year and steadily moved up. However its then 1288 peak was only briefly tested in 1990 and it was not until early 1993 that a new peak was recorded, more than 5 years later.
Similarly the Jan 1994 peak of 2138 was only briefly overcome 2 years later and no breakout to new highs was seen until mid-1999, also a time gap of over 5 years.
The Jan 2000 peak of 2583 or 2608 on the new STI was finally overcome in May 2006, again a 5 ½ year distance. So does this mean that the current 3831 peak could only be seen again only after 5 ½ years ie in 2013?
However if there is a repeat of the 1994-96 market when the STI tested the highs of 2140-60 in 2 years before the Asian crisis, we could see the 3800 level tested again at end 2009.
Most current year-end targets of the STI continue to be in the upper ranges between 3500-4000. In view of the steep consecutive plunges in January with end-2007 STI of 3466 it would be a great feat if we can see this level again by end-2008.
We have seen strong resistances at 3100 and 3200 and it will take time to get back to 3300-3400. Last year’s 2915 low and the recent lowest closings of 2866 and 2868 have become the ballpark area for support but until these 2750-2850 levels are tested again, the index is unlikely to break 3100 decisively.
A quick test of 2850 and 2750 should produce a good technical rebound to 3050-3100 but it is uncertain this will take place in March as the market seems to be aiming for a consolidation around 2900-3000.