It has been a very quiet fortnight with no major positive or negative news, as trading remained focused on “worsening credit worries”. During the fortnight, we did not hear of any new developments on the credit front apart from rumours that Freddie Mac and Fannie Mae could be nationalised by the US government which, in my opinion, is a piece of positive news as it will remove one more uncertainty – the fear of Freddie and Fannie collapsing – from the market.

Remember how the markets rallied when Bear Sterns was rescued from the clutches of bankruptcy?

Having said that, we cannot totally rule out more problems and write-offs for the banks as the housing prices in US still refuse to stabilise although the declines in some areas have stopped falling by big margins.

The banks will be safe from more writedowns only if home prices in the US stop falling and foreclosure rates do not continue to pile up. At the moment, we are not seeing any signs of such positive developments but, fortunately, the US economy is holding up quite well despite the thunderstorm in the financial industry.

The job market has not deteriorated and consumer spending – the pillar of the US economy – has not slowed beyond expectations despite reported worries about slowing spending.

Now that oil prices have come down quite considerably from a high of US$147 per barrel in July to around US$115 per barrel in August, inflation figures for the month of September should ease off. This is a major plus for the market as one of the “twin terrors” of inflation and credit worries is finally being slowly dealt with.

How will the Dow Jones Industrial Average (DJIA) perform?

Dow Jones Industrial Average
The DJIA was stuck in a 400-point range from 11,300 to 11,700 on the lack of fresh leads that could push the index higher. While there were sessions where the DJIA made triple-digit gains, continued worries on the credit front made sure that the DJIA quickly gave up its gains.

For now, the DJIA (See Fig. 1) remains above 11,300 with the next strong support only at 10,800 but it is unlikely that the DJIA will retest the 10,800-mark anytime soon. In the near-term starting from the week 1 September, we should see the DJIA trying to test the near-term resistance at 11,600 before trying to hurdle past 11,800 on expectations that inflation data in the month of September could be tamer-than-expected.

Although the DJIA is not exactly oversold after a decent rally from 10,800 to a high of 11,800, the recent correction has recharged the bulls who are ready to rally on good news and also on comments by Warren Buffett that some US equities have begun to look attractive.

Bear in mind that 11,800 is not an easy resistance to clear and any attempts to hurdle over this resistance must be accompanied by volume and the ability to hold above this level, otherwise any failure could result in downside.

Straits Times Index
The Straits Times Index (STI) is, perhaps, the most underperforming market in Asia during the fortnight. Despite several bouts of rally in US and Asian bourses, the STI drifted lower and lower from 2,811 on 13 August to below 2,700 at one point without any reprieve.

Although there were some intraday-rallies, these gains quickly evaporated without any support.

For now, the near-term support for the STI (See Fig. 2) stands at between 2,660-2,680 with the next Fibonacci support at around 2,550.
Several index-linked stocks have started to show signs of resilience and the STI, too, have continued to push above 2,700 whenever it dipped below 2,700. There are all signs of strength that should translate into more gains should the US and Asia bourses show more strength.

On the flipside, the STI may fall towards 2,600 should it fail to cross 2,746 – an important support that was breached and has now turned into a major resistance.

Hang Seng Index & Shanghai Composite Index
The Chinese bourses, including Hong Kong, did not fare too well either except for several spike ups that lacked conviction. The best moment for Shanghai (See Fig. 3) came when reports on some government intervention surfaced.

In the report, it was said that the Chinese government could potentially inject a few hundred billion Yuan into the economy in the form of tax cuts, property market measures and investments in regional markets. On that day, the SSE surged more than 7% while the Hang Seng Index (HSI) followed suit in a less aggressive fashion.

The HSI (See Fig. 4) has found support at 20,500 and its immediate resistance stands at 21,500 with the next important obstacle at 23,500. While there could be a near-term rally mostly on technical reasons – an oversold rally – the medium-term picture looks cloudy unless the HSI can clear 23,500 convincingly.

As for the SSE, it has always had the effect of affecting the Hong Kong market, which in turn affects the Singapore market during the day. Having already lost more than 60% of its market value since the peak last year, the SSE is now attempting to consolidate between 2,300-2,550 and a breakout above 2,550 could be meaningful.

Meanwhile, do not be lured into the market unless regional bourses rally in tandem with the US market on some positive news, which could either be oil falling below US$110 or inflation data coming in below expectation.

As suggested by the headline, a near-term rally could occur but the magnitude of such a rally remains in doubt. Investors should stay nimble and take profit on the slightest signs of weakness.

gabrielgan@amfraser.com.sg
Disclaimer: Opinions expressed in this article are solely those of the author and do not represent the opinions of this publication and/or the opinions of the organisation he represents.
Caption 1: Figure 1 – 11,800 is a tough resistance for DJIA
Caption 2: Figure 2 – STI faces major resistance at 2,746
Caption 3: Figure 3 – Shanghai Composite Index’s downtrend
Caption 4: Figure 4 – Hang Seng Index needs to clear 23,500 convincingly