SINGAPORE (May 22): During the week, the Straits Times Index, which closed at 2,499 on May 22, fell below its declining 50-day moving average at 2,532.

According to the general theory of moving averages, such a move is a bearish sign. Hence, the market could be up for further declines despite the sharp fall on May 22. This could be a reaction to fund redemption following the strong selling in the Hang Seng Index. Regional and global markets are related, because of ETFs and funds buying and selling in tandem.

Quarterly momentum which had moved above its own moving average in the past four weeks has slipped back to its moving average. This could be part of a base formation by momentum. If momentum moves sideways as the STI weakens, it is likely to form a positive divergence with the index setting the market up for a new bull market. Such a move may take months.

Similarly, annual momentum and two-year momentum are both flat and have shown minute movements despite the market’s sharp drop. They too, could be in the early stages of a base formation.

In the short term, though, indicators point to lower levels. The STI’s ADX — which helps to distinguish between a trending market and a ranging market — has turned up from a low level of 12, just as the DIs are confirming a negative cross. This suggests that the index could fall further from current levels.

In the meantime, short-term stochastics is falling, and the 21-day RSI is also declining after retreating from its equilirium line.   

The STI has tested and retreated from the 2,620-2,650 range twice. Hence this area is established as a resistance area, and could turn out to be the top of a base formation. Immediate support appears at 2,380—2,389. The year’s closing low reached on March 23 was 2,231, and that is the level that needs to hold should the decline accelerate. On a positive note, momentum has lost steam on the downside.