Fed’s Surprise Non-Tapering Lifts Markets. What’s Next?
By Ernest Lim
Asian stocks rallied as the Fed unexpectedly refrained from tapering and as Lawrence Summers withdrew himself as a candidate to be the next Federal Reserve chairman. (See Table 1 for the indices’ performance over the past two weeks)
able 1: Indices’ Performance Over The Past Two Weeks
Two weeks ago, I mentioned that the Standard & Poor’s 500 (S&P500) was unlikely to cross above the rising trend line (1,695 at that time of writing) before the FOMC meeting. It did not cross above the rising trend line on Day 1 of the FOMC meeting, but managed to rise above the rising trend line on Day 2 of the meeting when the Fed surprised the market by refraining from tapering. It closed 1,726 on 18 September (Day 2 of the meeting) but eventually weakened to close at 1,710 on 20 September. (See Chart 1 below)
RSI reached a high of 72 on 18 September before closing at 63 on 20 September. Since 19 January 2011, RSI has reached around 75 for four occasions. Thus, it is not unexpected that S&P500 gave up some of the gains after reaching a record high on 18 September.
Since 30 August, S&P500 has advanced for 11 out of 14 sessions. At the RSI of 63, it is not overbought. It remains to be seen whether S&P500 can hold above 1,700-1,709 in the next two weeks. However, it is very likely that S&P500 has formed a significant low near 1,630-1,635 and unlikely to go below that level barring any unforeseen circumstances. Important supports to watch are 1,700/1,672 -1,674/1,657.
Chart 1: S&P500 Rose To A Record Close 1,726 Before Closing 1,710Two weeks ago, I mentioned that if the Hang Seng Index (HSI) breached the upper trading range of 22,580, it was likely to head to a high of 23,500 which was the high seen on 20 May. I wrote that the odds were less likely given the existing stock market headwinds. However, I pointed out the odds depended on the strength of the Shanghai Index. Shanghai Index continued to rise about 5.4 percent from 2,140 on 6 September to more than a three-month closing high of 2,255 which provided (at least) some impetus to HSI which managed to reach the measured technical target of 23,500. It closed at 23,502 on 19 September.
HSI’s RSI was 72 on 19 September. The recent high that HSI’s RSI reached was 79 on 25 October 2012. Since 28 August, HSI has appreciated sharply, culminating with a gain of 1,978 points, or 9.2 percent in 16 trading sessions. It is likely that HSI may consolidate first after such gains. Significant supports can be seen at 22,700 & 22,280. Resistances are at 23,640 and 23,945 (See Chart 2 below)
Chart 2: HSI May Consolidate Its Gains; 1st Key Support: 22,700Two weeks ago, I wrote that the Straits Times Index’s (STI’s) near term rebound was likely to be capped around 3,097-3,163. It was stronger than expected, helped in part by Fed surprise move. STI closed at 3,238 on 20 September. It was up a hefty 233 points, or 7.8 percent since the low set on 28 August.
It is likely that STI may also consolidate its gains. Key supports are around 3,204 & 3,184. Resistances are at 3,269 and 3,278. (See Chart 3 below)
Chart 3: STI May Consolidate Its Gains; 1st Key Support: 3,204Fundamental Aspect
Although the Fed has unexpectedly refrained from tapering in its September meeting, there is still much uncertainty over when Fed may start to taper. There are several Fed speakers who will be speaking this week which may add uncertainty as market continues to guess when the Fed may start to taper. Last Friday’s market weakness was due in part to the speeches by the Fed speakers.
In addition, according to Reuters, US policymakers have to come up with a budget deal by the end of September and to decide whether to raise the debt ceiling by approximately mid-October. Although it is likely that they will eventually come to a decision, the process may add some uncertainty to the stock market.
Furthermore, the outcome of the Germany elections may contribute additional volatility to the stock markets.
In view of the above, markets are likely to remain choppy, especially after the gains seen in the past two weeks. Nevertheless, I remain bullish on equities with a horizon of a year. Personally, depending on the market, I would be slowly raising my stock allocation from 20-30 percent on market weakness in the next one to two months, perhaps up to 80-90 percent.
Do note that everybody is different in terms of returns expectations, risk profile, portfolio size, commitments, market outlook, stock preference etc. I am only giving myself as an example. [Another important point is that, due to the nature of my work, I can raise or decrease my allocation rapidly.]
Below are chart reviews of the four stocks, namely Kreuz Holdings, Swiber Holdings, Dukang Distillers Holdings and King Wan Corporation which I have mentioned two to four weeks ago. In addition, I will like to bring attention to Sino Grandness Food Industry Group’s chart.
Chart Reviews: Kreuz, Swiber, Dukang And King Wan
1. Kreuz Holdings – 6 September Close: $0.730, 20 September Close: $0.780, Intraday High On 16 September: $0.810
Two weeks ago, I mentioned that there seems to be buying interest for Kreuz as it has rebounded off its 100D EMA to close at $0.730 on 6 September with the highest volume last seen on 1 August. It continued to move and touched an intraday high of $0.810 on 16 September. It is currently trading within a tight range $0.770-0.810. Volumes expanded on days when Kreuz rose and contracted on days when Kreuz fell. Thus, it is a tad bullish signal. Odds are slightly higher that Kreuz may eventually break out of $0.810 after consolidation. If it breaks out of $0.810, an eventual measured technical target is approximately around $0.950. Supports and resistances are at $0.770/$0.750-0.760 and $0.800/$0.810 respectively. (See Chart 4 below)
hart 4: Kreuz Range Trade Between $0.770-0.8102. Swiber Holdings – 6 September Close: $0.650, 20 September Close: $0.665, Intraday High On 13 September: $0.695
Swiber managed to gap up on 9 September and reached an intraday high of $0.695 on 13 September. Based on Chart 5, the levels to watch would be whether firstly, Swiber would close the gap between $0.650-0.660 and secondly whether Swiber would close below $0.650 for three consecutive days. Swiber’s chart continues to be weaker than Kreuz. However, if Kreuz strengthens significantly, Swiber is likely to follow to a certain extent, albeit with some lag. Supports and resistances are at $0.660/$0.650 and $0.670–0.695 (confluence of resistances) /$0.705 respectively.
Chart 5: Swiber – Key Support At $0.650-0.6603. Dukang Distillers Holdings – 23 August Close: $0.445, 20 September Close: $0.500, Intraday High On 19 September: $0.520
A month ago, I mentioned that based on chart analysis and price action, the odds seem to favour that of a breakout above $0.475. Dukang’s price was momentarily weakened by Glaucus Research’s report on Minzhong released on 26 August. News that Fidelity Worldwide Investment (FIL) has become a substantial shareholder of Dukang (announced on 12 September) gave Dukang’s share price a boost to move above $0.475. Supports and resistances are at $0.470–0.475/$0.455-0.460 and $0.525–0.530/$0.560 respectively. (See Chart 6 below)
Chart 6: Dukang Surged After FIL Became Substantial Shareholder4. King Wan Corporation – 23 August Close: $0.320, 20 September Close: $0.300, Intraday High On 26 August: $0.325
A month ago, I wrote that if King Wan can breach the significant resistance around $0.325-0.330 with volume expansion, an eventual measured technical target price may be around $0.365. Conversely, if it breaches the support at $0.305 with volume expansion, an eventual measured technical target price may be around $0.265. King Wan did not manage to breach the resistance $0.325-0.330 but broke the support at $0.305. Given the low and sliding ADX of 18.0, it is likely to be range bound in the near term probably around $0.280–0.310 (See Chart 7 below). Supports and resistances are at $0.280-0.285 and $0.300-0.305 respectively.
Chart 7: King Wan – Likely To Range Trade Between $0.280–0.3105. Sino Grandness Food Industrial Group – 20 September Close: $1.270.
Based on Chart 8 below, Sino Grandness seems to have broken the downtrend line established since late July. Notwithstanding the strengthening indicators such as RSI and MACD, Sino Grandness has to clear a confluence of resistances around $1.290-1.315 with volume expansion to be bullish.
Besides the technical perspective, it is noteworthy that Sino Grandness has several potential developments in the next two months which may increase the probability of a breakout:
a) EGM on 23 September. Price may be supported as company would have the opportunity to brief shareholders on company’s developments;
b) Kim Eng luncheon on 24 September;
c) Appointment of investment bankers likely in four to six weeks;
d) Wuhan trade fair and analyst plant tour 5-8 October;
e) Standard Chartered seminar – Late October
f) 3Q13 results
Notwithstanding the above potential developments, it is noteworthy that the dates are tentative in nature.
Chart 8: Sino Grandness – Seems To Be On The Verge Of BreakoutIt is noteworthy that the above mentioned stocks are small cap stocks and they are likely to be more volatile than blue chips. In other words, they may drop more than the market if market weakens.
Please note that the above is my personal opinion and may not cater to your specific risk profile etc. The question of when to buy / sell and what to buy / sell differs greatly from individual to individual. Furthermore, it is extremely important to bear in mind that the market outlook is never static. It can change suddenly if there are sudden big events unfolding from the market – some events can happen as quickly as a few hours.
STI Supports And Resistances Are:
Support 1: 3,204
Support 2: 3,184 – 3,188
Support 3: 3,163
Support 4: 3,150
Resistance 1: 3,260
Resistance 2: 3,269
Resistance 3: 3,278 – 3,281
Resistance 4: 3,304
*Supports and resistances are not static levels. They may be subject to change daily.
Summary Of Economic Calendar For The Week Ahead (SIN Time)
22 Sep, Sun: (EUR) German Federal Elections;
23 Sep, Mon: (CNY) HSBC Flash Manufacturing PMI; (EUR) Germany, French & Europe Flash Manufacturing & Services PMI / ECB President Draghi Speaks; (USD) Flash Manufacturing PMI / FOMC Member Dudley Speaks;
24 Sep, Tues: (EUR) German IFO Business Climate; (USD) CB Consumer Confidence / Richmond Manufacturing Index / FOMC Member George Speaks;
25 Sep, Wed: (USD) Core Durable Goods Orders m/m / New Home Sales / Crude Oil Inventories;
26 Sep, Thurs: (GBP) Final GDP q/q; (USD) Unemployment Claims / Final GDP q/q / Pending Home Sales m/m / FOMC Member Stein Speaks;
27 Sep, Fri: (EUR) ECB President Draghi Speaks; (USD) FOMC Member Rosengren Speaks / Personal Income & Spending / Revised UoM Consumer Sentiment / FOMC Member Evans Speaks / FOMC Member Dudley Speaks;
*All economic data especially China data (if any) are subject to changes without notice. The above list is not exhaustive. I have merely listed the economic data which I feel has more impact to the market.
Please refer to Forex Factory Calendar for a more detailed / up to date list of economic events.
Information sources: Various sources such as Bloomberg, Daily FX, Dow Jones, Forex calendar, Zacks Investment Research, Reuters, SGX, Yahoo Finance, and Business Times etc.
All the best for your investment and trading!
Publish date: 24/09/13